Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : IMPERIAL HOTEL, TOKYO, JAPAN
Tarikh/Date : 16/10/98
Tajuk/Title : THE LUNCHEON MEETING ORGANISED
BY NIKKEI
" THE EXCHANGE CONTROL POLICY OF MALAYSIA "
Once again I would like to thank Nikkei for inviting
me to address this luncheon meeting. I would like to
talk about the Exchange Control Policy of Malaysia.
2. About a year ago I spoke in Hong Kong on the Asian
financial crisis and the need to regulate the activities
of currency speculators to protect developing countries
from having their limited wealth destroyed. Mine was a
voice in the wilderness and my views were regarded as
ridiculous in a world that was moving rapidly in the
direction of ever greater globalisation, deregulation and
liberalisation. When borders and the obstacles against
free trade were being dismantled how could anyone talk of
regulating the free flow of capital worldwide? Regulation
would stifle international investments by the rich which
would help the capital-poor countries to grow.
3. Malaysia of all countries should not talk of
obstructing capital flow because it had benefited greatly
through Direct Foreign Investments. Not only was
Malaysia's industrialisation the result of investments by
foreigners, but the Malaysian Stock Market, the biggest
in Southeast Asia was enriched greatly by massive
injections of capital from the rich countries. The
capitalisation of the Kuala Lumpur Stock Exchange rose to
around USD350 billion following road-shows conducted by
Malaysian companies to attract institutional investors
from the West. So why should Malaysia talk of curbing
the activities of foreign funds, including the hedge
funds?
4. Malaysia is no more capable of predicting the
future than anyone else. No one actually predicted the
extent of the economic turmoil which now engulfs the
whole world. No one can claim they expected that the
financial problems of Thai banks would spread so widely
that today not only is the whole of East Asia affected,
but Russia and Latin America are also affected. Even the
great United States of America is not beyond being
affected by the turmoil which began in East Asia as
demonstrated by the effect of massive losses by the Long-
Term Capital Management Fund in their investments in
affected countries.
5. As I said, Malaysia did not foresee the extent of
the damage that could be caused by the currency trading
of the hedge fund managers. Malaysia was concerned
largely with the possible effect on the development
objectives of the country.
6. Many experts talk about fundamentals, about
confidence, about herd instincts and contagion effects.
It was suggested that sound fundamentals and good
transparent financial management would prevent contagion
and the flight of capital. Countries of Asia would do
well to reform their financial system in order to create
confidence among the people who control the flow of
funds.
7. Malaysia was and is not convinced that currency
traders do business based on their confidence or lack of
it in any country. We believe they are motivated by pure
greed, by their desire to make as much profit for their
funds as they can, irrespective of the cost to others. If
they have to destroy the wealth of countries and the
livelihood of poor people they would not hesitate to do
so, if there is good profit to be made.
8. We believe, and we said so, that currency traders
are not speculators but are manipulators instead. The
difference is that while speculators depend on their
perception of the trend of the market and they place
their bets accordingly, manipulators know exactly what
direction the market would take because they have the
capacity to manipulate the markets. Thus if they want
the currency to be devalued, they can do so simply by
repeated selling of that currency until the target is
achieved.
9. Of course Central Banks may defend the currency by
buying it repeatedly. But the capacity of the Central
Banks is limited by the reserves they hold. For
developing countries like Malaysia the usual reserve
would be around USD20 billion. But hedge funds can
leverage their funds by twenty times through credit made
available by giant international banks. In the case of
the Long-Term Capital Management Fund, for their USD4
billion, they were able to borrow USD120 billion and
leveraging on this they obtained credit amounting to one
trillion dollars. Between the hedge funds which are
involved in currency trading, they hold about USD180
billion. Leveraged by twenty times even, they would have
at their disposal USD3.60 trillion. No Central Bank can
match them. Defending a currency under attack is an
exercise in futility.
10. But hedge funds are not the only ones involved in
currency trading. The big banks worldwide have made
currency trading their principal activity, their main
source of profits. Clearly these funds have unlimited
resources to manipulate the market. They can buy or
borrow any amount of any currency and sell to devalue.
They are in a position to devalue any currency at will.
They are not dependent on the vagaries of the market at
all.
11. If they want to short sell any currency they can do
so. And of course they can literally determine how much
profit they want to make for themselves. Their investors
believe that the size of the funds they invest in will
ensure that they can never lose. How can they when they
can revalue or devalue according to the profit making
plans that their Nobel laureates had designed.
12. Clearly these funds and their managers have
tremendous power, power which far exceeds those of
Governments and countries. This power is real and the
exercise of this power not only bring profits for them
but can actually force Governments, affected or not, good
or bad, to cringe and kowtow before them. They, the
funds' managers can actually force the Governments of the
countries they attack to submit to their whims and
fancies. In fact they can and they have brought down
Governments.
13. With this enormous power, it would be a miracle if
they do not become corrupted. We repeat ad nauseam,
power corrupts and absolute power corrupts absolutely.
The hedge funds and the great banks of the world have
absolute power and they are therefore absolutely
corrupted. They would abuse that power to satisfy their
greed. The LTCM debacle has proven this to be true.
14. This was what Malaysia saw when we condemned the
hedge funds and currency trading. We saw shadowy figures
in the world's financial centers wielding enormous power
without any rule or regulation or morality. We saw them
exploiting developing countries like Malaysia which had
reached a certain stage of development and is therefore
rich enough to make their kind of financial abuse
profitable to them. And since no one supervises these
funds, and there are no regulations, rules or laws for
them to submit to there is no limit to their quest for
quick and limitless profits. Countries and people must
suffer as a result.
15. That was what we saw and it was this that
frightened us. It was the possibility of unending
suffering from the destruction of what we painstakingly
build every time. Human greed can only be curbed by
human society. If society gives a free hand to powerful
greedy individuals they will destroy everything in order
to satisfy their lust for wealth and power. They will
destroy society itself.
16. When Malaysia urged either the abolishment of
currency trading or regulating it we had not taken into
account the role of the IMF. This relic of the defunct
Bretton Woods system has now become an instrument of the
rich to dominate the poor. The IMF is supposed to
promote the restructuring of the financial system of the
developing countries in order to improve their economic
performance. But the remedy it proposes seems more
likely to destroy the economies than to improve. In the
end the banks and corporations will fail and their
Governments bankrupted. Knowing this the clients of the
IMF would refuse to comply but if they refuse the
currency traders and the stock-market raiders would
devalue the currency and the shares. Thus the developing
countries would comply with the demands by the IMF
including opening up the markets. With the shares
scraping bottom and the currency devalued, the foreign
banks and corporations would be able to buy up the banks
and all the businesses at rock bottom prices.
17. Between the IMF, the currency traders and the big
foreign banks and corporations, between them they would
be able to buy up all the worthwhile businesses in the
developing countries under IMF control. Once they have
control of these businesses, it would be an easy matter
to strip the assets or to refloat the economy and control
the countries completely.
18. Maybe Malaysia is paranoid but what has happened
today has shown that it has reasons to fear, to be
paranoid even.
19. Malaysia appealed to everyone to regulate currency
trading. Most laughed at Malaysia for not understanding
the workings of the world financial system, for not
understanding herd instincts, the role of confidence etc.
A few, and this include the IMF, humoured Malaysia,
promised to study and then did nothing. Time was running
out and the Malaysian currency and shares were falling
rapidly. In neighbouring Indonesia the currency had
fallen through the bottom. Could Malaysia wait while the
IMF and others fiddled?
20. Believing that the world, especially the rich and
powerful would not help, Malaysia decided to do things on
its own. It toyed with the idea of adjusting wages and
prices to reflect the exact level of devaluation. Thus
if the currency is devalued by 20 percent, then all wages
and prices would be increased by 20 percent. This way
the people would not feel the effect of the currency
devaluation. But the implementation of this solution
would be too complex.
21. The best way was to isolate and insulate the
Malaysian currency from the other currencies of the
world. The Ringgit should be legal tender only within
Malaysia. Any Ringgit found outside Malaysia would be
prohibited from being brought back into the country. This
makes the Ringgit outside Malaysia completely worthless.
22. Of course most of the Ringgit outside is not in the
form of cash. Such offshore Ringgits would have to be
reflected in Vostro accounts in Malaysian banks. Any
offshore transaction must involve transfers from one
Vostro account to another Vostro account in Malaysian
banks. To stop the offshore Ringgit from being lent,
bought or sold and so to have value abroad, transfers
from one Vostro account to another is forbidden. Thus
lending or sale of offshore Malaysian Ringgit will not be
acknowledged in Malaysia. Since the Ringgit is not legal
tender outside of Malaysia, owning Malaysian Ringgit
abroad becomes quite meaningless.
23. For the first month the offshore Ringgit may be
transferred back to Malaysia. After that it may not be
transferred at all thus rendering the offshore Ringgit
useless and without any value.
24. Within the borders of Malaysia the Ringgit remains
legal tender and can be used for all transactions
including the purchase of all foreign currencies. The
exchange rate of the Ringgit was fixed at RM1.00 to US26
cents or RM3.80 to the USD1.00 and to the Dollar
equivalent of all other currencies. Since the exchange
rates between the US Dollar and other currencies
fluctuate, obviously the exchange rates between the
Ringgit and other currencies except the dollar will also
fluctuate. But this is not much of a problem as changes
can be made to the exchange rate against the dollar in
order that the competitiveness of Malaysian products will
be maintained. However this will not be done until every
avenue for ensuring competitiveness has been explored and
applied. A fixed exchange rate can only be regarded as
fixed if it remains at the level for a considerable
length of time.
25. Besides the exchange rate of the Ringgit, Malaysia
has also insulated its stock exchange from being
manipulated by foreigners who care nothing for the well-
being of Malaysian companies or its people in their quest
for quick profits from capital gains. Today, as a result
of the measures we have taken, the share prices reflect
the performance and asset value of the businesses more
closely. Other measures have been taken to prevent
manipulators from deliberately bankrupting the businesses
so they may buy them cheaply, probably in order to strip
assets.
26. We can expect the greedy foreign capitalists and
their collaborators in their Governments and other
institutions to try to undermine the measures we have
taken. They would want to force us to submit to them
again. But so far we have been able to withstand their
attempts.
27. In the first month of the implementation of the new
strategies the performance of the Malaysian economy has
been quite encouraging. Reserves have increased and
business has generally improved. The slide into
contraction has been slowed. Foreign direct investment
has not been adversely affected. Investors, both foreign
and local are finding that the fixed exchange rate makes
forward planning easier and more reliable. Business
needs predictability of the future environment and the
fixed exchange rate provides this.
28. Exchange rate control is not the same as control on
capital flows. Capital can flow in and out of Malaysia
without restriction. In even the most developed
countries the movements of currency in and out of the
country are recorded and controlled. Of course many
developing countries require such movements to be
declared. So what Malaysia has done is only to enforce
currency movement regulations so as to be able to control
the exchange rate.
29. Because capital can flow in and out of Malaysia,
foreign investments and foreign trade are not affected.
Trade settlements have to be in foreign currency because
the Ringgit has no value outside Malaysia. Foreign
currency must be changed into Ringgit to pay for all
transactions in the country. To take out money the
Ringgit must be changed into foreign currencies. As
Malaysia has a large trade balance and minimal foreign
short-term loans there will be no shortage of foreign
currencies. Since the implementation of the fixed
exchange rate and the enforcement of the rules regarding
the movement of money in and out of the country there has
been no major problem.
30. The allegation that Malaysia is isolating itself
from the international community is completely without
basis. Malaysia is a trading nation. It just cannot
isolate itself if it wants to trade. A fixed exchange
rate facilitates trading. Hedging is no longer as
necessary as before and this reduces the cost of trading
in goods and services. Long term contracts for supply or
construction can be entered into in Ringgits without
having to worry that it may lose its purchasing power
during the period of the contract.
31. There is of course a need for Malaysia to conserve
foreign exchange. Imports must therefore be limited to
essentials and exports enhanced. A "Buy Made in
Malaysia" campaign has helped a lot in slowing the
outflow of funds. Travel abroad is possible but funds
taken out in foreign currencies have to be limited. The
limit is reasonable and not too restrictive. Malaysia is
mindful that it has a medium sized airline and the
viability of this airline depends on the number of
Malaysians travelling in and out of the country. We
cannot restrict travelling too much.
32. Clearly the control of the movement of money and
the restriction of the Malaysian Ringgit going out of the
country is a limited exercise which is not noticeably
more than the controls by many countries, developed and
developing, over the movement of money crossing their
borders. The main effect of Malaysian restriction on
currency movement is to prevent the Malaysian Ringgit
from being traded by currency traders. To them the
Ringgit has zero value simply because to trade they will
have to have the Ringgit outside Malaysia. Any Ringgit
outside Malaysia will not be allowed to be brought back
into Malaysia in whatever form. Since the Ringgit is
legal tender only in Malaysia, not being able to bring
the Ringgit back into Malaysia makes it useless.
Therefore the main losers as a result of Malaysia's
control over the movements of the Ringgit are the
currency traders.
33. But who gains? The Western detractors and their
media are quick to broadcast that the beneficiaries are
the cronies of the Government of Malaysia, as it is an
Asian Government.
34. The Government of Malaysia has no cronies. We
believe in cooperating with the private sector simply
because the revenue of the Government comes largely from
corporate taxes. Twenty-eight percent of the profits of
the private sector belong to the Government. In helping
the private sector to make profits we are actually
helping ourselves, the Government.
35. The measures taken by the Malaysian Government will
benefit the whole business community, local and foreign.
It will also benefit the indigenous (Bumiputera)
businessmen, but not appreciably more than the non-
Bumiputera businessmen. We are in the process of
redistributing wealth between the different communities
in order to eliminate racial jealousies. We will
continue to do this with apology to no one.
36. If you come to Malaysia you will not believe that
we are facing economic turmoil. There is an appearance
of business as usual everywhere. No one is starving.
People are not searching for food in rubbish heaps. The
shopping complexes and restaurants are doing good
business. There is minimal unemployment.
37. The reason for our appearance of normalcy is due to
our very strong fundamentals from the very beginning. We
have been able to manage the currency and share market
depreciation fairly well. And now with measures we have
taken to control the movement of the Ringgit and the
share market we are less affected by outside
manipulations. We think we are already seeing the
economy turning around. We think we are on the road to
recovery.
38. In business the most important thing is stability
and predictability. Business takes time to give a
return. The measures taken by the Malaysian Government
are calculated to achieve stability all round; political,
economic, financial and social stability for now and for
the foreseeable future. Since they will do this and are
already doing this, they should be welcomed by the
business community, whether foreign or local.
39. The only people who will not benefit from the
measure taken by Malaysia are the currency traders. We
are now seeing how destructive these people can be. If
they lose I don't think we should be sorry. It is their
abuse of currency exchange which has caused the present
economic turmoil in the world. They deserve to lose.
40. I welcome the interest shown by this forum in
Malaysia's measures to deal with the currency turmoil
caused by unregulated trade in currency. I hope that you
will now have a better understanding and appreciation of
what Malaysia has done. We may succeed or we may fail
but whatever happens there will be a lot of lessons in
financial management of a country that will be useful for
everyone.
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