Malaysia steadies after PM's threat

CLOUDS over the political stability of Malaysia have begun to clear as it emerged that Prime Minister Mahathir Mohamad will remain in office until September 2003, despite his shock announcement at the weekend that he was ready to stand down.

Stock markets have been rocked as investors fretted about political upheavals surrounding the succession to the 21-year reign of the veteran politician, and a 1.75% dive in share prices on Tuesday was added to Monday's plunge of nearly 3%. This followed Saturday's tearful announcement by Mahathir to a conference of the ruling United Malaysia National Organisation (Umno) Party that, at 76, he felt it was time to give up all his offices.

Although senior party members quickly persuaded him to withdraw the announcement, the prospect of his departure threw Malaysian markets and politics into turmoil. On foreign exchange markets, the Malaysian dollar remained steady because of the peg to the US dollar controversially introduced by Mahathir after the 1997 Asian economic crisis. This peg could come under pressure if foreign investors begin shifting liquid assets out of the country as insurance against political upheaval, or signs of a growing political power base for fundamentalist Muslims.

British companies with interests in Malaysia will be monitoring carefully the succession to Mahathir's regime, which has seen volatile relations with Britain.

In the mid-1980s Mahathir, incensed by a British decision to raise fees for overseas students and angry at a refusal of landing rights at Heathrow, instigated a Buy British Last policy, which threatened to severely damage exports to the country. Only the personal intervention of then Prime Minister Margaret Thatcher, and a controversial deal over arms and aid on a rural water scheme worth £194m, ended the boycott.

Shocks are still not over. Earlier this year, ambitious expansion plans by foreign supermarkets groups, including Tesco, were called into question by official curbs on the building of hypermarkets. These were seen by many as a way of protecting local retailers against powerful competition from major combines.

Mahathir has been seen as a hands-on Prime Minister when it comes to business as well as economics. It was his vision that created the Proton carmaking plant against international advice in the 1980s. In 1996, in what was seen in Malaysia as a triumphant rebuff of colonialism, Proton, which started off making badge-engineered Japanese cars, took more than 80% of the shares in the British sports car company Lotus.

The chance of an orderly handing over of power strengthened on Tuesday as Umno prepared a timetable that would leave Mahathir in office until next year. It is expected that Deputy Prime Minister Abdullah Ahmad Badawi will be named as Mahathir's successor, but political commentators in Asia warn that there could be some vigorous infighting for the post among other ambitious candidates.

While Mahathir has reigned supreme and unchallenged, Umno is known to have been continuously rocked by internal jockeying for important posts. Given Mahathir's tenacious grip on power, it is expected that he will still serve in some capacity, perhaps similar to that of retired Singapore Prime Minister Lee Kuan Yew, who continues to wield influence behind the scenes as a senior minister.