Few countries in Asia attract as much unfavourable attention as Malaysia has lately. Sometimes it's justified: Anwar Ibrahim's injuries under custody, for one. Prime Minister Mahathir Mohamad's attempts to blame foreigners for his country's problems hasn't helped. But Malaysians aren't xenophobic and the country is working through its problems--although with room for improvement. Indeed, the central bank last week confirmed that GDP declined 1.3% year-on-year in the first quarter--after an 8.1% fall in the preceding period--a sign that the economy may have bottomed out without incurring a debt with the International Monetary Fund. Still, Kuala Lumpur draws attention to its flaws like a lightning rod.

Certainly, there are problems to merit unfavourable report. Even if GDP were to grow 2% this year as some believe, Malaysia's economy would still be 5% smaller than in 1997. If this is a recovery, it means only that people aren't getting poorer. It'll be a while before the country regains its pre-crisis wealth. And here there is reason to worry about the pace of much-needed corporate restructuring. You'd think that those who ran companies into the ground would be out the door by now. Yet, the faces in corporate boardrooms have changed little. 

On another front, we wonder if Malaysia Airlines, which is 12 billion ringgit ($3.15 billion) in hock, wouldn't be better off if market mechanisms decided its future. There is speculation that the government-owned petroleum company, Petronas, is considering a controlling stake.

Be that as it may, Malaysia isn't always in worse shape than those against which it is often unfavourably compared. While bad debt is high, estimates of this at 25%-30% of total loans this year is below the 45% in Thailand, and Indonesia's 75%-85%. Also, Kuala Lumpur to date has taken over $6 billion worth of bad loans and bank recapitalization is progressing well. As a whole, the banking sector is stable. Then there's the question of Malaysia's risk factor, a matter raised when it recently issued its 10-year global sovereign bond. The paper was priced at 330 basis points above equivalent U.S. Treasurys. Many noted that South Korean and Thai sovereign issues were trading at only 240 and 230 basis points, respectively, above Treasurys. But forget Korea; you can't compare an OECD economy with a developing country. On the surface, comparisons with Thailand seem appropriate. The problem is that while Thailand's Yankee issue maturing in 2007 often is regarded as a benchmark, it is tightly held and illiquid--begging the question whether it is actually a benchmark. 

Bid-offer spreads on its "2007 Yankee" sometimes can be as much as 30-40 basis points, compared with the usual 5-10 basis points expected of sovereign paper. And while it's true that the market eagerly snapped up the state-owned Electricity Generating Authority of Thailand's $300 million 10-year bonds in October, it wasn't a recognition of low risk in a quasi-sovereign issue: The World Bank is guaranteeing the principal and one interest payment.

While on the whole Malaysia may not be better off than its neighbours, neither is it faring worse. The perception that it is may be coloured by its insistence on maintaining capital controls, which unfairly changed the rules of capital flow midstream. Controls are a big, black mark. So if it wants to alter the perception that it says is unfair, Malaysia may want to consider better treatment for the investors it locked in with controls. After all, give a little, get a little.