The Finance Minister, Daim Zainuddin, is reported to have said that with the resolution of the Suqiu issue, the performance of the Kuala Lumpur Stock Exchange will improve (The Star, Jan 7,). By implication, Daim believes that the Suqiu issue is responsible for the key KLSE barometer index, the KLCI, that has been straggling.

The Suqiu (Malaysian Chinese Organisations' Election Appeals) issue may, in some part, have contributed to the insipid movement of the KLCI. But there are other, and larger, issues that have brought this about. Rather than playing the ostrich, the government must accept the critical situation that the index reflects.

Political considerations are seriously viewed by foreign fund managers. The appeals that were made by Suqiu could have been interpreted by managers as indicative of a future tilt in the balance of power.

But this is just one in a sequence of incidents that signal the weakening hold of the Barisan Nasional. Losing the by-election in Lunas is an unhappy flicker. Having 10,000 people amass at a highway to protest against the Prime Minister is, again, an undesirable flicker.

Foreign analysts will also, I am sure, be equally anxious about the manner in which the government supports inefficient businesses. We must remember that financial analysts, by training, are very cautious and sensitive people. Above all, they strongly believe in the virtues of a free and efficient market.

The management of MAS and the methods adopted by the government in resolving the company's crisis must have left a firm imprint in the minds of analysts. The government does not effectively convey a message of being serious about market efficiency when it purchased the 29 percent equity owned by former MAS chief executive officer Tajudin Ramli at RM8 each.

Whether or not the government did in fact obtain the RM1.8 billion to buy Tajudin's shares from the Pensions Trust Fund is another issue.

More pertinent is the fact that the national carrier was probably mismanaged. Even more shocking to anybody who believes in the importance of the market system is the fact that the government intervenes in order to support ailing businessmen.

Danaharta shield

Those financial analysts who watch the performance of Malaysian equities are concerned about corporate governance. They want a system that they can monitor and which can be transparently explained. Danaharta is not exactly open to scrutiny.

It is claimed that Danaharta holds a certain percentage of Berjaya shares. What we shall never know is the size of Berjaya's non-performing loans that Danaharta has assumed.

Danaharta is not obliged to announce or publish details regarding the size of non-performing loans that it takes over. While Danaharta has the proud responsibility of salvaging "sick" companies, it places itself in danger by screening from public view the extent of damage that has been wreaked on the economy.

Everybody wants to invest in a country that has good economic fundamentals, that is politically stable, and where the principles of good corporate governance are practised.

These are the criteria against which foreign investors measure a county. If these criteria are not satisfactorily met, then it should not be surprising that the KLCI should keep meandering in a bearish fashion.

Good economic performance alone is not sufficient to attract the attention of foreign funds. Last year the country performed remarkably well. Economic growth was about 8 percent. Private consumption grew by about 12 percent. Malaysia's trade surplus was about RM58 billion in the year 2000.

Malaysia's good export record for the last year had no impact on the KLCI. That is because less than 20 percent of the companies on the KLSE are export-oriented. So high exports do not get translated into an aggressive upward movement in the index.

Suqiu is just one wave

Well, Daim does probably have a point. The point being that signs of racial turmoil are not taken well by the international financial community.

But what the good minister has not acknowledged is that the Suqiu is one wave among the many waves that have been rising and falling, particularly since 1997.

Another noteworthy statement that the minister made the same day was: "If you keep on predicting, people will believe and it becomes a reality" (The Star, Jan 7).

Daim, like some economists, believes that expectations fuel an economy. He is, I suppose, trying to say that expectations can have a self-fulfilling effect. Again, this is, in part, correct; but perhaps not entirely so.

The smarter of the economists will add that economic agents will periodically revise their expectations. Let us take a simple hypothetical example. I predict that the government will be able to foster greater unity amongst the people of this country. I assume that this will result in some upward movement in the KLCI.

What will I do? Put all of the $1 million that I have into the stock market? No. It is more likely that I make my investments in stages, watching to see if there are signs that my prediction, is in actual fact being realised.

In spite of the simplistic picture that Daim is trying to present, there is not doubt that he knows that political stability and expectations are important factors. These are two crucial areas that need to be sensitively managed.

SHANKARAN NAMBIAR is an economics lecturer at a private institution in Penang.