On March 2, Temasek, the Singapore government's principal investment arm, was permitted by Kuala Lumpur to purchase 5% of national phone utility Telekom Malaysia for 1.6 billion ringgit ($421 million). The stake was part of a 9% block of Telekom Malaysia stock put up for sale by state investment company Khazanah Nasional, Malaysia's equivalent of Temasek. The deal followed news that Temasek was negotiating with shareholders of Alliance Bank, Malaysia's second-smallest bank, to buy a controlling 30% interest in it.

The sudden easing of restrictions on Singapore government acquisitions in Malaysia underscores the improvement in bilateral relations since November 1, when Abdullah Ahmad Badawi took over as prime minister from Mahathir Mohamad. Since then, Abdullah has met with Singapore Prime Minister Goh Chok Tong three times--Mahathir seldom got together with the Singapore premier--and has openly talked about resolving several long-standing disputes with the island republic instead of resorting to international courts.

Cash-rich Temasek has publicly expressed its intention to invest more in Asia. But despite buying stakes in banks in Indonesia and Thailand last year, its investment strategy was conspicuously lacking a foothold in Malaysia, Singapore's biggest Asian trading partner. The new rapprochement, say political analysts in both countries, could lead to more cross-border deals in sectors ranging from banking and port services to water treatment and infrastructure services.

Malaysia's change in tack may be simply pragmatic, and rooted in economics. The country has posted six straight years of budget deficits and has scaled back public spending sharply. To keep growth ticking over, it needs all the foreign investment it can get, and treating Singapore like any other investor could be a deliberate policy shift in that direction. The Malaysian government also needs to raise funds and has decided to sell down its directly or indirectly held stakes in selected state-controlled companies to do so. One solution: Let Singapore Inc., with its fat wallet, buy in.

Take the Telekom stock placement, for example. Initially, Khazanah wanted to sell 300 million Telekom shares and trim its shareholding in the utility to 33% from about 43%. On the morning of March 2, however, securities analysts say they were told by Khazanah's investment bankers that just 150 million shares were to be offered because "there was no market" for the rest. But when Malaysian officials gave Temasek the green light to buy as well, all 300 million shares were quickly sold, earning Khazanah 2.9 billion ringgit.

Malaysia and Singapore have maintained correct, if sometimes cool, relations over the past four decades. Trade and investment involving non-government companies has flourished and Singaporean tourists regularly flock to Malaysia. Malaysians--mostly of Chinese origin--comprise the majority of skilled, foreign nationals working in Singapore's government and private sector. Indeed, one of the senior directors in Temasek in charge of investment strategy is Richard Ong, a Malaysian.

But Malaysian political analysts say ties deteriorated in 1997 after Singapore Senior Minister Lee Kuan Yew described Johor Baru, the capital of Malaysia's Johor state, as "notorious for shootings, muggings and carjackings."

WAR OF WORDS

Since then, the two countries have been engaged in a war of words over a batch of issues--from the price of water Malaysia sells Singapore to the use of airspace and railway access. A territorial dispute over a small island and Singapore's recent offshore reclamation work near Malaysia have already gone to international arbitration to be resolved.

Enter Abdullah and the new diplomatic thaw. Singapore officials have no doubt why this is happening. "In Malaysia before, Mahathir would see anything with Singapore's name on it and he would say no," says a senior official in Singapore's Ministry of Foreign Affairs. Malaysian officials, for their part, blame ministry officials for the cold war. "They were the most hardline in their approach," says one.

An enduring theory about Malaysia-Singapore relations has it that ties will only improve when the generation of leaders involved in the separation of the two countries almost 40 years ago is no longer in power. That may be so: Abdullah and Goh were in their 20s in 1965.

Michael Vatikiotis in Hong Kong contributed to this article

                                                      Home