ANALYSIS-Malaysian shuffle: foreign money in, local money out

By Mark Bendeich

KUALA LUMPUR, Oct 22 (Reuters) - Malaysia is celebrating a big rebound in foreign direct investment into the country, but the real news is that local capital is leaving just as fast.

Local businesses, including many oil companies flush with cash, are investing offshore like never before -- a trend that showed up in startling U.N. investment figures issued last week.

The trend is already making itself felt in monetary policy and could hasten reform of corporate Malaysia, analysts say. In time, it could even expose the country's unpopular affirmative-action policy to stronger winds of reform.

The data showed that inflows to Malaysia rebounded in 2006 to a 10-year high of just over $6 billion after years of dwindling investment. The real surprise, though, was that outflows equalled them, their highest total since U.N. records started in 1980.

And it is not a statistical blip: after more than 20 years of averaging about $1.3 billion in annual outgoing direct investment, outflows began to steadily pick up in 2003, according to data collated by the U.N. Conference on Trade and Development.

"I think the business case is very, very compelling," said Eric Fishwick, deputy chief economist with investment bank CSLA, referring to the rise in offshore investment by Malaysian firms.

"Malaysia still has a relatively dirigiste (state-directed) economy and it just increases the incentive to look overseas and the incentive to raise your returns."

Malaysia's maturing economy offers smaller returns than some other, racier emerging markets like neighbouring Vietnam, but economists say this is nothing new. The real change, they add, is that the government now encourages many companies to go offshore.