(AFP) Malaysia today lifted the last remaining capital controls over foreign investment in its stock market.

The flat 10 percent exit levy on profits from portfolio investments which are repatriated within one year has been scrapped with immediate effect, the finance ministry said in a statement.

The market closed 4.6 percent higher and analysts and investors welcomed the move as positive. But they said an immediate major inflow of foreign investment was unlikely.

Malaysia must work on its fundamentals including improving corporate governance standards, they said.

"The abolition of the levy today is the culmination of a series of gradual steps towards full liberalisation which began in February 1999," the ministry added.

Malaysia announced selective capital controls on September 1, 1998 to defend its ringgit during the regional financial crisis.

In a highly unpopular move it initially announced it was banning the repatriation of stock market investments for a year.

Authorities replaced this in February 1999 with a graduated exit levy and had further eased the rules since then.

The ringgit remains pegged at 3.80 to the dollar and is not convertible outside the country.

'Pleasant surprise'

"It is positive news for the market," said Yuen Chak, analyst with Merrill Lynch.

"But there are some lingering concerns among foreign investors - a slowing economy and the perception of weak corporate governance."

Nizam Idris, Singapore-based regional economist with IDEA Global.com, said the decision was taken to reverse an outflow of funds which has seen Malaysia's foreign exchange reserves dwindle.

He called the announcement a "pleasant surprise" but did not expect an immediate major inflow of funds.

"At least it will put Malaysia in the good books of foreign investors if regional sentiment improves," said Nizam, who described the exit levy as "the last reminder of persecution against foreign investors".

An investment officer with a Singapore-based Japanese asset management company said the decision would not necessarily bring its fund back to Malaysia after a two-year absence.

"Anything that removes any barriers is a good move, but we would still look at fundamentals of the company and issues such as corporate governance (before deciding to invest)," the official said.

Phua Lee Kerk, fund manager with Singapore-based APS Asset Management, said the move would cut tedious red tape but would not spark the rapid or mass return of foreign funds.

Long-term funds might be drawn back but this would take time.

Political risk

Phua said Malaysian companies will have to improve their competitiveness.

"The key issue is how attractive are Malaysian-listed companies from the global perspective. Actually, there are only a few attractive companies," he said.

Song Seng Wun, regional economist with Singapore-based G.K. Goh Research, said the move was positive "but whether it will be the catalyst to bring money in is debatable".

Song said Malaysia continues to be undermined by political risk and the possibility that the ringgit may be devalued.

He said he still does not think Malaysia will scrap the fixed exchange rate regime or revise the ringgit's peg this year.

But the threat was there if foreign exchange reserves kept falling.

"Malaysia cannot continue to tolerate US$2 billion (forex outflows) every month," Song said.

As of mid-April the reserves stood at US$26.285 billion. Ministers and senior officials insist they will not change the peg - despite pleas from some manufacturers who say their exports are becoming relatively more expensive as other regional currencies decline.