ETF and iShares® Investment News & Articles

Commentary: Malaysia And Singapore: A New Détente

An easing in relations between the two countries could prove lucrative for both

Bilateral relations between Malaysia and Singapore often seemed like Southeast Asia's most rancorous soap opera. Singapore, which was part of Malaysia until it broke away in 1965, has always depended on its neighbor for everything from timber to skilled labor. And Singapore remains Malaysia's second-largest trading partner after the U.S., with annual two-way trade of $44 billion. But the two have long squabbled over issues big and small: the price Singapore pays Malaysia for fresh water, sovereignty over Malaysian railroad tracks on Singapore soil, and even land reclamation in the waters that mark their border.

The drama was never good for business. Instead of coordinating their plans to attract foreign investment, the neighbors competed for the attention of the same multinationals -- and spent billions of dollars duplicating each other's infrastructure, from state-of-the art airports and container docks to high-tech industrial parks.

The tension started to ease when Malaysian Prime Minister Mahathir Mohamad last November handed power over to his soft-spoken deputy, Abdullah Badawi. The former foreign minister lost no time mending fences with Malaysia's rich neighbor. In January, Badawi visited Singapore and spent a weekend talking with the city-state's leaders and playing golf. In February he invited the Singaporeans to a Chinese New Year celebration in Malaysia. Then, when Lee Hsien Loong took over as Singapore's Prime Minister in August, the first foreign leader to congratulate him was Badawi. Singapore has reciprocated by putting several disputes on the back burner. "Both sides seem to be saying: 'Enough is enough,"' says Krishnasamy Kesavapany, a former Singaporean ambassador to Malaysia.

The rapprochement, of course, has much to do with the new leaders seeking to establish themselves. Badawi wants to emerge from the shadow of Mahathir, who ruled Malaysia for more than 22 years. And Singapore's Lee is seeking to outgrow the legacy of his father, Lee Kuan Yew, who led Singapore's breakaway from Malaysia, and his father's successor, Goh Chok Tong, who stepped down on Aug. 12 after nearly 14 years in office.

But the real impetus is business and realpolitik. The two export-oriented economies face mounting pressure as multinationals move manufacturing from their nations to cheaper plants in China, India, and other low-cost sites. "The change of leadership allows us to leave old baggage behind and move forward to forge a new partnership that takes into account the new realities in our region and around the world," says Malaysian Foreign Minister Syed Hamid Albar. To stay competitive, Badawi has called for greater cooperation and has given a hearty welcome to Singaporean capital.

The money is already flowing. The Singapore government's investment arms have poured nearly $800 million into Malaysia this year. State holding company Temasek Holdings bought 5% of Telekom Malaysia for $422 million in March, and 15% of Alliance Bank Malaysia for $125 million in July. In June, Government Investment Corp. bought 70% of a Johor Baru shopping mall for $123 million and 5% of infrastructure developer Gamuda for $53 million. Then in July, GIC paid $28 million for 5% of Shell Refining Malaysia.

The cash flow may soon be two-way. Khazanah Nasional, the Malaysian government's investment arm, says it wants to buy stakes in Singapore government-linked companies, and Malaysian conglomerate Sime Darby (SIDBY ) is negotiating to purchase 30% of shipbuilder Jaya Holdings Ltd. for $122 million. And a deal signed in June by the Malaysian and Singaporean bourses will make it easier for portfolio investors from either side of the border to trade stocks in both countries. "As the two markets become integrated, we might see more cross-border mergers and acquisitions," predicts fund manager Tan Chong Koay, who has nearly $700 million under management in the region.

Sure, back-burner issues, such as the price of water or a dispute over pension money earned by Malaysians who have worked in Singapore, could heat up again. But for now, at least, the two countries and their new leaders have some pretty good reasons for getting along. As in any good soap opera, there's always a time to kiss and make up.By Assif ShameenCopyright 2000-2004, by The McGraw-Hill Companies Inc. All rights reserved.

By Assif Shameen
Copyright 2000-2004, by The McGraw-Hill Companies Inc. All rights reserved.