Malaysia: Exchange Controls

1998

Dr Chua Beng Huat

On September 1 this year the Malaysia government announced that it had imposed complete currency control on the Malaysian ringgit (RM), to make it non-legal tender outside the country by the end of the month. Concurrently, to stabilise the exchange rate, the Malaysia ringgit was fixed at an exchange rate of RM 3.80 to US$1. The statutory requirement of funds to be deposited with the central bank, Bank Negara, was substantially reduced, so as to allow the banks greater cash liquidity. Interest rates were also reduced, reversing the high interest rate regime imposed during the year. FDI companies will be able to repatriate their profits by conversion to other currencies, but the capital investments must stay in Malaysia for no less than one year before they can be repatriated. Similarly for stocks and share investments. All these economic strategies are aimed at stabilising the domestic economy. From the very outset of contagion from Thailand, the Malaysian Prime Minister, Dr Mahathir, has blamed speculative global financial capital as the demon behind the destruction of wealth that has taken Malaysia more than thirty years to build up. The primary concern is therefore to keep all speculative capital, including hedge funds, out of the Malaysian economy. Secondly, Mahathir has always maintained that the large Malaysian conglomerates are fundamentally sound but have been dragged down by crippling exchange rates, due to speculative attacks on the Malaysian currency. The new rules governing the banking sector are aimed at improving RM liquidity in the market, so as to enable local companies to obtain loans at reasonable interests in order to remain in business. Thirdly, the Malaysian government is convinced that there are large sums of RM parked outside the country, especially in Singapore banks, enjoying higher interests than what Malaysian banks could offer, thus depriving local business of funds. Currency control is expected to force the repatriation of these 'stashed away' funds to Malaysia. The impact on Singapore's financial market has been immediate. The trading of Malaysian shares in Singapore through the Singapore Stock Exchange through omnibus proxy holdings (the Clob system) finally ceased, something that Kuala Lumpur has wanted for a long time, resulting in huge losses among Singaporean investors. Furthermore, according to Mahathir himself, RM 11 billion of the funds deposited in Singapore were repatriated to Malaysia even before the end of September. Mahathir has vowed to keep these control measures around until such time as there are international regulations on speculative financial capital. Clearly the full and long term consequences of Malaysia's move have yet to play themselves out. However, while criticisms from free-marketeers are to be expected, Mahathir is not without cautious support from internationally recognised economists and other central bankers. Obviously, if it works, Malaysia's strategy will start a stampede of faltering economies moving in the same direction.

WATCHPOINT: Will Malaysia's exchange rate strategy work?

 

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