Michael Pomerleano, a capital markets specialist at the World Bank, said that although Malaysian companies pursued a rapid build-up of fixed assets in the period immediately before the East Asian crisis, "prudential financial practices"-due in part to the country's progressive regulatory and supervisory practices-allowed them to avoid the financial distress that had immediately befallen other companies in the region.

Malaysian firms, Mr Pomerleano said, were financially sound and comparable to, among others, those in Hong Kong and in the United States. In fact, according to a standard indicator of financial fragility, Malaysian firms were more robust than those in a few developed economies.

Mr Pomerleano noted that before the advent of the crisis Malaysian companies were not over-leveraged because they had sufficient operating cash flow with which to service their debt.

Malaysian firms also stood up well against a sample of over 1,600 firms from around the world in terms of the efficiency with which a company uses its capital resources. " … only for five economies, namely Hong Kong, Japan, Malaysia, Singapore, and the United States, did the return on capital employed consistently exceed the cost of capital" in the four years prior to the East Asian crisis," Mr Pomerleano said.

What this implies is that Malaysia was unique among the sample in having companies that delivered positive shareholder value. Indeed, economic value-added of Malaysian companies may well be even higher if steps were taken to develop the domestic capital market.

Mr Pomerleano attributed the regional crisis partly to a rapid build-up in fixed assets which led to declining profitability and excessive leverage. In addition, he said that it was also due to an over dependence on the banking system and an under-reliance on capital markets in both absolute and relative terms. Citing one statistic-that the bond market in Asia is under 20% of GDP, compared to the United States, whose bond market is over 100% of GDP-he suggested that the rehabilitation of the banking system should be complemented with the development of a balanced domestic capital markets in order to mobilise capital for Asian firms' recapitalisation needs.

Mr Pomerleano made these remarks at a seminar organised by the Securities Commission that was also attended by members of the corporate sector and the investment banking community. Mr Pomerleano is in Malaysia to speak at a conference organised by the Federation of Asean Economic Association, Malaysian Economic Association and Economic Development Institute of the World Bank to be held on 15 October 1998.