Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : THE NIKKO HOTEL, KUALA LUMPUR
Tarikh/Date : 02/09/99
Tajuk/Title : THE SYMPOSIUM OF THE FIRST
ANNIVERSARY OF CURRENCY CONTROL
"Why Malaysia's Selective Currency Controls Are
Necessary
and Why They Have Worked"
Please let me add my words of welcome to this
international symposium on currency controls and Asian
monetary cooperation.
2. My task is to talk about the strong but selective
currency controls which Malaysia imposed exactly one
year and one day ago.
3. After such an incredibly momentous 366 days, I can
make no better introduction than to remind you that
what is now the past was once the future.
4. That future then was a most uncertain one. For
all of Southeast Asia and most of East Asia it was a
most threatening, devastating and gloomy future.
5. Many had been driven to desperation and despair.
Confidence was in even shorter supply than capital.
Many believed that we would all collapse.
6. We were told each and every day, many times a day
-- sometimes by the very same people who had so shortly
before told us that we were dragons and tigers -- that
we had suddenly all become either lame ducks or dead
ducks.
7. I can do no better than to start by turning your
minds back to this time just a year ago.
8. After more than one year of devastation, much of
East Asia was in ruins. There was little hope for the
future. There was no light at the end of the tunnel.
In fact the tunnel seemed to be without end.
9. Every day brought news worse than the day before.
When something bad happened in Thailand or China, our
stock markets fell; our currencies shook. When
something unfortunate occurred in Indonesia or Hong
Kong, our stock markets took a beating; our currencies
were pummeled. When something untoward happened in
South Korea or Japan, our stock markets quaked; our
currencies were hammered. When Malaysia contributed our
own share of bad news, the stock markets of our
regional neighbours fell; their currencies shook.
10. The explanations were simple. Seldom were more
than two words necessary: 'regional contagion', 'herd
instinct', 'crony capitalism', 'corporate governance',
'vicious circle', 'financial panic'.
11. For some reason which I don't understand Malaysia
was least liked by certain quarters. Besides the
attacks against our economy, it was made obvious to us
that the Government should either be overthrown or the
Prime Minister at least should get lost.
12. But for Asia, Mr Alan Greenspan the most powerful
man in the world issued a 'blunt warning' that Asia's
economies were continuing to weaken. 'The evidence we
have to date', Mr Greenspan said on July 22nd 1998,
'still exhibit no evidence of stabilisation'. Indeed,
he noted, 'The most recent data still exhibit
deterioration'. The man who warned about 'irrational
exuberance' when the Dow Industrial Average was at
6,600 also warned that a sharp US stock market drop was
inevitable at some point. Not 'possible'. Not
'likely'. But 'inevitable'.
13. Back to Malaysia, one day after we unveiled our
National Economic Recovery Plan, which set out more
than 200 reforms and transformation measures, on the
very eve of the departure of the Malaysia road show
intended to raise two billion US Dollar in bonds --
Moody's showed its immaculate timing and not so
immaculate predisposition by downgrading Malaysia's
sovereign debt rating to just above junk bond status.
14. The very next day, Standard and Poor's did the
same.
15. It was no surprise that the Kuala Lumpur Stock
Exchange (KLSE) plummeted to a nine-year low. The
Ringgit came under heavy pressure. The bond exercise
was, of course, aborted.
16. Let me paint for you the background of news and
events against which the decision to impose our strong
if selective currency controls was made. To simplify
and shorten it I will merely read to you some of the
headlines of the international press, starting from
July 3rd, 1998. For obvious technical reasons, I
cannot quote to you the much more colourful and punchy
TV headlines.
17. On August 3rd: The Nikkei Weekly reported that
'Looting, destruction stagger Indonesia'.
- The Financial Times headlined 'Gloom over the
Philippines' short-term prospects'.
- The International Herald Tribune reported that
'South Korean Exports Fell by 13.7 per cent in July --
Concern Grows That Recession May Deepen'. In the same
issue, the IHT carried a feature which suggested that
China would devalue:-
(i) if the Yen collapsed;
(ii) if China's growth rate were to falter and;
(iii) if there was pressure from Chinese exporters.
- Many news reports and analyses from the world
media followed on the collapsing Yen, on the faltering
China growth rate and on China's loss of export
competitiveness.
18. On August 3rd also, The Asian Wall Street Journal
reported: 'Japan's Jobless Rate Rose To a Record 4.3
per cent in June'. Business Week's story on Malaysia
was headlined: 'Suddenly, Companies Are Falling Like
Coconuts -- A rising tide of bankruptcies threatens to
engulf the Malaysian economy'. Whether we would die
from brain concussion arising from falling coconuts or
from mere drowning by the 'rising tide of bankruptcies'
was not made clear.
19. On August 3rd, the IHT also ran a story headlined
'What If the Worst Happens in Asia? Not So Bad'. This
article reported the finding of 'respected economists'
at Standard & Poor's that under a 'worst-case scenario'
in which Japan's economy shrinks by 10 per cent, in
which China's economic growth rate falls from eight per
cent to one per cent, and in which Indonesia lapses
into default on its foreign debts, the United States
would experience only a 'mild recession'.
20. Let me read to you some of the headlines of August
4: Tokyo (stock market/currency) fall hits Asia
Markets' -- The Financial Times. 'China demands
Indonesia act on riot racism' -- The Financial Times.
'Hong Kong Hurtles Towards Recession' -- IHT. 'China
to Fight Deflation With Spending' -- IHT. 'Yen Falls to
7-Week Low Against Dollar' -- Asian Wall Street
Journal. '(Malaysian) Stocks Face Fall if Malaysia Is
Axed From (Morgan Stanley) EAFE Index'.
21. On August 5, The IHT reported: 'Concern Over Yuan
Hits Stocks in China' and 'Seoul Earmarks State-Owned
Firms to Be Sold'.
22. On August 6, The IHT reported that the 'East
Asian Trade Slump Adds to Economic Woes'. The Asian
Wall Street Journal reported 'Thailand ¬ Surge in
Business Failures'. The Financial Times announced that
'Japanese consumption slumps by 3.1 per cent' and that
'Shanghai foreign currency rise highlights fears of
(Yuan) devaluation'.
23. Against this background, on August 6, 1998, after
months of detailed discussion and more than two dozen
meetings, full and complete consensus was finally
reached that Malaysia had to abandon 30 years of
committed currency orthodoxy. At exactly 10 minutes
past 10 on August 6, 70 minutes into the regular daily
morning meeting of the Executive Committee of the
crisis-management National Economic Action Council, the
decision was finally made to impose strong but
selective currency control.
24. The date of implementation was still open but it
was decided that the Malaysian currency should no
longer be available to currency traders to manipulate
the exchange rate. The Government would fix the rate
according to its own wisdom.
25. Since the share market was also being manipulated
through short-selling activities, it was decided that
the repatriation of foreign equity investments should
not be allowed until one year after the investments are
made. However it would not be possible to implement
this decision if the illegal market in Singapore, the
Central Limit Order Book (CLOB), was not stopped. By
using nominee companies sales on the CLOB could avoid
registration with the KLSE. Thus shares could still be
borrowed and short-sold. To stop CLOB all shares are
required to be registered in the name of the actual
owners with the KLSE. Ownership by nominee companies
was not recognised and any change of ownership not
registered on the KLSE would be considered illegal.
26. However direct foreign investments in productive
capacities in the country were exempted from the ban on
repatriation of either capital or profits.
27. After August 6, the unanimous decision could have
been changed or amended.
28. But there was absolutely no reason for doing so.
Indeed, everything seemed to justify the urgent
necessity for insulating the Malaysian Ringgit from
currency speculation and attack and of guaranteeing
rock-solid currency stability.
29. On August 7: The IHT reported that 'Fears Grow of
Beijing Devaluation -- Yuan Falls to 5-Year Low in
Black-Market Trading'. The Financial Times reported:
'Hong Kong stock market at three and the half year low
-- speculators worry over authorities' commitment to US
Dollar peg and China's pledge not to devalue'.
30. In their week-end issue which came out on August
8: The Asian Wall Street Journal reported that 'In
Asia, Worst for Economies is Seen Ahead'. On its
leader page, the ASWJ ran a feature on 'Beijing's
Choice: Preserve Stability or the Yuan'. The IHT
argued: 'Financial Crisis Straining Asian Neighbors'
Political Ties'. On another page, the IHT headline
read: 'Vietnam Devalues Dong by 7 Per Cent'; and
'Speculators Intensify Attack on Asian Money -- Yuan
and Hong Kong Dollar Face Pressure'. The Financial
Times reported: 'Dealers in China Rush to US Dollars'.
31. Thank goodness for Sundays, when the global news
media try to take a break. But by Monday, August 10,
the horrible news was back. The Financial Times
reported: 'Malaysian race rumours spark fears'. Those
who were not here but who know Malaysia might be
reminded that this was a story not on Malay-Chinese or
on Chinese-Indian or on Malay-Indian problems but about
a possible outbreak between Malaysians and illegal
Indonesian workers; hardly 'racial' I would have
thought.
32. On August 10, the cheerful news from the Asian
Wall Street Journal was that: 'Investors Expect That
Asia Stocks Will Drop More'. This despite the fact
that in the preceding week stocks plunged a further 12
per cent in Jakarta; a further 9.9 per cent in Manila,
a further 9.6 per cent in Kuala Lumpur; and a further
7.2 per cent in Hong Kong. The AWSJ noted that Tokyo
fell by only 3.4 per cent.
33. Let me give you some other news headlines which
appeared on August 10, 11 and 12: 'Obuchi Issues Call
to Action on the Economy -- First Policy Statement
Generates Scant Praise; Financial Markets Fall'.
'Obuchi Admits to Prolonged Slump'; 'No Confidence in
Japan'; 'Critics Attack Japan Banking Plan'; 'Korean
Earnings Reports Won't Be Pretty'; 'Currency Worries:
Attack by Hedge Funds has run into domestic factors in
(Hong Kong)'; 'Hard time for HK -- and set to get
worse'; 'Yen Hits 8-Year Low as Fears Mount'; 'Concern
Grows Over Hong Kong Dollar'; 'China's Central Bank
Says It Won't Devalue Yuan'.
34. I also most sincerely apologise for not citing
the headlines which chronicle the human and social
costs of the Asian crisis. To make an economic or
financial or monetary decision without considering the
grave human and social consequences is more than
stupid. It is criminal. And I say this no matter how
many economics Ph.D's and financial whiz kids say that
they cannot be concerned about the non-economic and the
non-financial and the non-monetary matters.
35. I certainly am surprised how merely reading,
today, the headlines of a year ago provides eloquent
testimony to the dire economic and financial and
monetary uncertainties of this time last year.
36. As you well know, on August 14, 1998, Hong Kong,
the bastion of free market laissez faire capitalism,
decided to frustrate the stock market and currency
manipulators by buying heavily on the Hong Kong Stock
Market.
37. Currency turmoil hit Latin America. Russia
defaulted and some famous people lost billions. LTCM,
despite having two economics nobel laureates, a while
later also lost a great deal of money and had to be
bailed out by friends in high places. As you well know
Asia went through further hell before it could,
finally, embark on the road to recovery.
38. I have sketched for you the international
background against which the decision was made: the sea
of turbulence from which it was natural for a small
tempest-tossed boat to seek refuge -- by retreating to
a quiet bay of tranquility.
39. Let me now mention to you Malaysia's own
background of experience, failure and crisis.
40. The fact is that we tried practically everything.
And everything we tried had failed.
41. As you know, at the beginning, along with the
rest of the world, we under-estimated the severity of
the effects following the Baht crisis which started on
July 2, 1997. Everyone, from the IMF down, did not
foresee the severity of the so-called regional
contagion.
42. In mid-June, 1997, Malaysia had received an A+
report card from Mr Michel Camdessus himself. We were,
understandably, very confident we were not 'Mexico' or
'Thailand'. So confident, in fact, that we quickly and
without reservation pledged one billion US Dollar in
financial assistance to Thailand, doubling Australia's
initial 500 million US Dollar pledge. We later pledged
another one billion US Dollar to Indonesia.
43. Then, the stock market began to collapse in
earnest, as did the Malaysian Ringgit. The real
economy -- those who produced real goods and services
rather than financial instruments -- followed in train.
44. When the real economy started to collapse, we
made a horrible mistake. We adopted what has been
called 'the IMF package without the IMF'. It was very
macho.
45. I felt that I should and not comment other
people's economic risk management. Now I wish I had
not resisted my gut feelings. But then this was the
way the great minds had devised to deal with such a
crisis.
46. Once crisis struck, domestic demand and
investment had to be buttressed. So what did we do?
Under the finest IMF advice, we decided not to buttress
but to cut Government fiscal spending by 21 per cent.
This was the single most devastating mistake. But we
were so very obedient.
47. We should have decided on a deficit budget,
something we could well afford after years of budgetary
surpluses. But we again followed the finest IMF
advice. We went for another budget surplus.
48. We should have left the banks alone. Instead we
told them to stop using the 6-month non-performing-loan
regime and told them to adopt a 3-month NPL regime.
With that we helped to strangle businesses earlier.
49. But that was not quite enough. We told them not
to lend money for so-called non productive activities.
And the banks stopped lending altogether. It seems
nothing was productive any more to them.
50. We were told that the market would not see the
return of confidence until they saw blood. They want
to see our businesses crushed and exsanguinated. We
obliged but it was never enough. Blood, more blood
must be spilt.
51. Bleeding profusely, we nevertheless wondered why
we were getting weaker. And why was there still no
return of that precious commodity called confidence.
52. Instead of holding or even reducing interest
rates, we decided to raise the cost of borrowing to
levels no business could survive. Not surprisingly,
many businesses grounded to a halt.
53. When business comes to a halt, an economy drops
like a stone. This is what happened. The Malaysian
economy dropped like a stone.
54. From the very beginning, I was accused by the
foreign Press of 'being in denial'. I admit I did
harbour different views as to the causes of the
economic turmoil. Not accepting the accepted views
apparently translates into being 'in denial'. I must
not single out the foreign press alone. Some local
pundits too echoed the 'being in denial' accusation.
55. What were the choices before us? If we did not
push interest rates further to the sky, large amounts
of Malaysian Ringgit would move to Singapore, where
depositors could secure up to a 35 per cent return.
Depositors apparently did not mind their Ringgit
getting devalued by speculators as long as they earn
high returns on their deposits. And so the Ringgit
flowed out and left the local banks without money to
lend. The speculators borrowed, short-sold and
devalued the Ringgit further.
56. But if we try to compete with Singapore and push
interest rate higher, our businesses would simply stop
doing business. The real economy goes through the
floor.
57. This was exactly what happened. When we made the
decision on currency controls on August 6, we knew that
our GDP in the second quarter of 1998 would contract
massively, to a level not seen since the birth of
Malaysia.
58. Our currency had already fallen from 2.5 Ringgit
to the US Dollar to 4.8 Ringgit to the US Dollar at one
time. Inflation, unprecedented inflation set in. And
even as the cost of living shoots up more people will
lose their jobs and incomes. Social turmoil must
follow and obviously political instability as well.
Malaysia imported almost 80 billion US Dollars worth of
goods and services. At four Ringgit to one US Dolllar
the loss of purchasing power was 48 billion Dollars.
59. The stock market index plunged from more than
1000 to 262 by end of August 1998. Market
capitalisation of more than 800 billion Ringgit was
reduced to under 300 billion. For the banks and the
companies this loss was real. Margin calls could not
be met and banks stopped lending to strickened
companies, aggravating an already bad business
situation. The foreign observers almost openly gloated
over the company failures. It was good. They were
bleeding. Soon the Government bereft of corporate
taxes would bleed as well. And what will it do? Turn
to the IMF for help of course.
60. But the IMF had not done anything worthwhile for
other beleagured economies in East Asia. All it did
was to change creditors. They still owe money and
their currencies could still devalue, their stock
markets plunge. Additionally they have to surrender
the direction of their economies to foreign masters,
people who could only see revival of the ability to pay
foreign debts as the sole objective of having a
Government. The people may starve, they may riot and
loot and kill. These are irrelevant as long as foreign
debts are paid. The IMF with its limited stock of
remedies is no alternative.
61. We wanted to borrow from the market but as I
mentioned earlier the great rating agencies, in their
desire to protect us from being permanent debtors,
downrated our credit rating so that borrowing from the
market would simply aggravate our problems.
62. In a free market economy the well-being of the
Government and therefore the nation depends on the
success or failure of the private sector. If one
company fails, or even a small group fails, Governments
can find ways and means to compensate. But when all
the banks and all the companies fail, there is no way
the Government can finance itself. It will fail also.
There would be social and political instability and
probably anarchy. Governments cannot therefore allow
businesses to fail en masse. Yet that was what was
happening consequent upon the devaluation of the
currency and plummetting share prices. The free market
is a great system. It can contribute towards economic
growth and the betterment of the people. But it can be
abused and when it is abused, the economy can be
totally destroyed and innocent people made to suffer.
63. We in Malaysia subscribe to the free market
system but it is not a religion with us. It is just an
economic system devised by imperfect man. While we
should try to adhere to it closely, we see no reason to
accept everything done in its name when we no longer
reap any benefit from it. A system is only as good as
the result it delivers. After all it was the belief
that the system would deliver the result which led to
its formulation. If it does not deliver must we still
blindly adhere to the system?
64. When the free market system was evolving no one
designed it for currency traders to make massive
windfall profits overnight. It was designed for fair
competition between equals, for trade in real goods and
services, for free flow of investments to where capital
was needed and profits from commercial activities can
be made. No one declared that currencies should be
regarded as commodities and traded like sugar or wheat
or coffee. Currency was just a facilitator of trade, a
way of doing away with cumbersome barter trading or
payment in precious metal.
65. Without currency trading the free market can
still function. Indeed for a long long time there was
no currency trading while the world traded and grew
economically. Fixed exchange rates enabled values to
be attached to goods and services. Occasional
disruptions can occur when Governments change the
exchange rate of their currencies but the damage to
world trade was nothing compared to the last two years
of economic turmoil worldwide. We in Malaysia feel
that we are not being disloyal to the free market if we
disallow currency trading. Our real trade should not
be affected nor should foreign investment in productive
capacities suffer.
66. But the Malaysian economy also suffered from
excessive manipulation of the stock market, in
particular short selling. This particular stock market
activity is normally acceptable but when big players
with the capacity to move the stock prices up or down
at will become involved, it is no longer speculation.
It is nothing more than manipulation. Just as insider
trading is not allowed, we don't see any reason why
market manipulation should be allowed.
67. Government had stopped short-selling on the KLSE
but Singapore had set up an illegal offshore market
over which the Malaysian Government had no control. If
the Malaysian economy was to be stabilised then the
operation of CLOB had to be stopped.
68. And so on September 1st 1998 Malaysia stopped the
trading in the Ringgit and the operations of CLOB.
Ringgits resident outside Malaysia in whatever form
would become invalid unless repatriated within one
month of the date. Capital invested in Malaysia shares
may not leave the country for one year, although other
capital invested in Malaysia may move in and out
freely. Profits may be repatriated freely also.
69. From the foreign currency speculators, foreign
equity investors, foreign free market economists, and
the English-language world press there were only three
types of reaction:
-abuse, undiluted and constant;
-abuse in the guise of intellectual discourse; and
-abuse in the form of unsolicited and free advice.
70. My friend, the great George Soros, called our
September 1st measures 'outrageous'. Given his world-
view and the need to make money from large currency
movements it was no doubt 'outrageous'.
71. Business Week labeled Malaysia a 'Renegade
Economy'.
72. The New York Times reported a senior Clinton
administration official as saying that the turn of
events in Malaysia was 'a tragedy'. Our measures
would, he said, be a 'spectacular failure'.
73. Time magazine quoted a Bangkok-based expert as
saying: 'Mahathir is turning Malaysia into a Burma. It
will create a black market for the currency, and there
will be a panic in the country to buy US Dollars'.
74. The erudite Business Week said that the measures
could 'run down foreign reserves, making devaluation
likely and prompting trade restrictions'. The great
economist Milton Friedman told the world that
Malaysia's move was 'the worst possible choice'.
75. The great International Herald Tribune proclaimed
that 'Malaysia last week shut the door on the global
economy'. Pretty strong stuff.
76. A London-based analyst said that Malaysia was
suffering from an 'IQ crisis'. This, I am sure, must
be a reference to the fact that we do not have two
economics nobel laureates advising us. It can not be a
reference to the suggestion, very often made, which I
am sure is true, that 'What Dr. Mahathir knows about
economics can be written on the back of a postage
stamp'.
77. Abuse from the foreign currency speculators and
manipulators who could no longer make money out of the
misery of the Ringgit I can understand. Abuse from the
foreign equity investors who had to wait for one year,
I can fully understand. Abuse from the free market
economists I can also fully comprehend. After all, we
were challenging a sacred commandment. But the abuse
from the English-language world press is a little
puzzling.
78. As you will no doubt have noticed, the first line
of argument marshalled against us was that we were
absolute idiots. Disaster would immediately strike.
Malaysia was 'kaput'. Finished.
79. Then, when it was clear that disaster had not
struck, that Malaysia was not 'kaput', not finished, we
saw the argument that whilst death was not at hand, the
Malaysian economy would be crippled. The medium-term
effects would be enormous.
80. When it has become clear that Malaysia had
succeeded and was well on the road to recovery, the
latest line of argument is that Malaysia's
accomplishments are clear but that the IMF-assisted
economies have done as well as we have without having
to resort to currency controls.
81. The proponents of this line of argument seem to
have had a blind logical spot. If they can argue that
the others have achieved comparable results without
having to adopt currency controls, can it not be argued
that we have achieved what others have achieved without
having had to go through: the misery of massive
unemployment; the tragedy of children thrown out of
schools; the decimation of the middle class which we
have spent a generation to build; blood on the streets
and political turmoil throughout the land.
82. We have been able to achieve what others have
achieved: without having to go into massive debt;
without saddling future generations with massive debt-
servicing burdens; without having to sell our family
silver and our precious heirlooms; without having to
auction off our precious corporations to foreigners at
fire-sale prices; and without having to bend and to bow
to anyone; without having to kiss anyone's feet.
83. Most assuredly, what we think are deeply
important to us may not be equally important to others.
The economies of East Asia are all different.
Comparisons are often difficult and unfair. But most
surely each country has the right to decide on its
priorities and to choose its own path to recovery.
84. And most obviously, the unorthodox, bold and
strong measures which we took 366 days ago has borne
fruit.
85. We were told that there would be massive capital
flight one way or another. People would be breaking
doors trying to get their hands on US Dollars. Interest
rates would be forced up because of a severe shortage
in liquidity. There would be a black market in every
nook and corner. There would be massive over-
bureaucratisation as an army of civil servants would be
needed to administer the system. Corruption would run
rampant as Malaysians and Malaysian businesses buy
their needed supply of hard currencies, which would, of
course, be in short supply. Exporters would under-
declare their exports. Importers would over-declare
their imports. Transfer pricing would run riot. The
Ringgit would not be able to stabilise. Indeed, it
would be forced to devalue. Needless to say, the stock
market would go into a further tailspin. Malaysian
shares would not be worth one cent.
86. To this day, there are the most erudite
economists who can find in their imagination the
currency black market that none of us have been able to
find. The Ringgit has remained rock solid. In fact,
if there are 'fears', the 'fear' and the widespread
expectation is that the Ringgit would strengthen.
87. As for the stock market, I might just mention
that at the end of August 1998, before anyone got the
whiff on our currency measures, the Kuala Lumpur
Composite Index stood at 302. By the first week of
July 1999, it had shot past the 870 mark. It has since
corrected. I have every confidence that it will
shortly begin its upward march once again.
88. One year ago, the market capitalisation of the
shares on the KLSE was under RM300 billion. It now
stands at more than RM500 billion. More than RM250
billion has been created. The 'wealth effect' has
found its way through the economy.
89. As for the crucial interest rate, in August 1998
the base lending rate was 11.7 per cent. Today, it is
below seven per cent.
90. In August 1998, our exports stood at 5.79 billion
US Dollar, minus 17.8 per cent on an annualised, year
on year basis. In June this year, it rose to 6.9
billion US Dollar, plus 17.8 per cent on an annualised
year on year basis. Our export performance has
surpassed that of any other economy in East Asia.
91. In August 1998, our external reserves was 20
billion US Dollar. By the end of July this year, this
had increased to 32 billion US Dollar, an increase of
60 per cent over a period of 11 months.
92. In August last year, we had enough to finance
four months of retained imports. By July, our external
reserves were sufficient for seven months of retained
imports.
93. I am sorry to disappoint our critics. We were,
we are, and we do not expect to be short of foreign
exchange. We were, we are and we do not expect to be
short on liquidity. And with the third highest savings
rate in the world -- in excess of 40 per cent of GDP --
we are in no way dependent on straight foreign capital,
although we of course love foreign direct investment.
94. In August 1998, our inflation rate stood at 5.6
per cent. In June this year, this had plummeted to 2.1
per cent. The Producer Price Index was a plus 14.5 per
cent in August. It had plummeted to minus 6.7 per cent
in June.
95. The number of new monthly job retrenchments has
fallen from 7,125 in August to 1,580 in July, four and
a half times lower.
96. On the other hand, the number of job vacancies
has jumped from 6,005 in August to 9,711 in July.
97. As for the banking sector, please note that the
average risk-weighted capital adequacy ratio of the
banks in Malaysia stood at 8.2 per cent in August 1998,
which is within the international standards set by the
Bank of International Settlements. In June of this
year, the ratio stood at 12.7 per cent.
98. The non-performing loans of the banking system on
a six months basis stood at 11.4 per cent in August
1998. Contrary to the expectations of the foreign
experts, it did not shoot through the roof. Indeed,
NPLs fell to 7.9 per cent in May this year.
99. On a three-month basis, NPLs stood at 12.8 per
cent in September. I am sorry to confound those who
think they know better. But NPLs on a three-month
basis stood at only 12.7 per cent in May. Compare this
with the 30 per cent or 40 per cent or 50 per cent seen
elsewhere.
100. The Manufacturing Production Index recorded a
minus 14.5 per cent in August last year. In June this
year, it recorded plus 12.4 per cent.
101. Sales of passenger cars have jumped from 13,701
in August 1998 to 20,141 in June 1999. Sales of
motorcycles have jumped from 19,369 to 21,225. Sales
of new commercial vehicles have jumped from 1,681 in
August to 2,691 in July.
102. I can go on and on and on with the statistics.
If you do not like or trust statistics, just visit the
shops and the restaurants. Only, give yourself a
little extra time -- because I am afraid the traffic
jams have come back.
103. In the third quarter of 1998, we suffered massive
negative growth. In the fourth quarter of 1998, we
improved but the contraction was still double-digit.
By the first quarter of this year, we had achieved a
massive turn-around to minus 1.4 per cent growth, a
remarkable turn-around when it is remembered that if
not for a large minus seven per cent in January, when
production was hit by the Muslim Eid-il-fitri
celebrations and the Chinese New Year, the first
quarter would have seen positive growth.
104. I can tell you today that in the second quarter,
we achieved 4.1 per cent growth.
105. On the ground, we know that we have made a
massive recovery. Technically, because a recession is
defined as two consecutive quarters of negative growth,
we can now say that the great Malaysian economic
recession of 1998 has come to an end.
106. We now receive the nicest praises, sometimes from
the most unlikely places.
107. Mr Michael Dee, Managing Director of Morgan
Stanley Dean Witter's Asian debt capital markets said:
'The measures taken have ¬ reduced its vulnerability
to external shocks. Malaysia should be proud of its
achievements as it did not use IMF's recovery measures
but stayed from it'.
108. Ann Ginsberg, Morgan Stanley Vice President and
Senior Sovereign Credit Analyst says that: 'The
controls have been used properly. In fact, it has made
the country -- which has a healthy balance of payments
-- more competitive'.
109. Margaret Kelly, Senior Advisor in the IMF's Asia-
Pacific Department has said that Malaysia 'has wisely
used the breathing space provided by the controls'.
Her number one boss, Mr Michel Camdessus, has said: 'I
praise the way in which Malaysia has been able to adopt
a soft system of controls'.
110. Mr Camdessus's comment suggests one reason why
our strong but selective currency controls were
successful. It was indeed a soft system. Contrary to
what our critics assumed and stated, our measures were
not 'draconian', not heavy-fisted, in no way punishing
-- or even inconvenient. No bureaucracy was needed
because the commercial banks did most of the work in
the normal course of their business.
111. A second very important reason is the fact that
we were successful in our export drive. The foreign
exchange came in by the bucket. Contrary to the
warnings of our detractors, there was no shortage of
foreign exchange and there was no liquidity problem.
We had to be firm but we had the wherewithal to operate
what Mr Camdessus called 'a soft system of controls'.
Malaysia was flushed with funds. I would not recommend
any country to try exchange controls if they are going
to fail to generate substantial trade surpluses.
112. A third reason for our success is the fact that
we merely and very sincerely tried to guarantee the
stability of the Malaysian Ringgit, not its value. We
wanted a fixed rate, not a high rate for the Ringgit.
113. Fourth, we succeeded because we deliberately
sought to stabilise the Ringgit at a reasonable level,
not at an over-valued level -- for technical
stabilisation reasons and because we always had our
export and national competitiveness at the forefront of
our minds. We certainly did not try to achieve a rate
for the Ringgit which the fundamentals could not
justify. Because the Ringgit was reasonably valued
there was never a rush or a reason to convert to a
foreign currency unnecessarily.
114. Another reason for the success of the measures we
took was the fact that with this single bold step,
confidence in the stock market, in the Malaysian
Ringgit and in the real economy was quickly restored.
Without this rapid, almost over-night restoration of
confidence, we could not have succeeded. Had we seen
riots in the streets, had we suffered political
instability, confidence could not have returned.
115. Tied to the confidence and the optimism was the
fact that our controls were selective. They took the
most meticulous care not to in any way hinder trade or
the repatriation of profits.
116. Foreign direct investors did not pull out. More
foreign direct investment in fact flowed in. Not
surprising since exports were booming. Investors
laughing all the way to the bank do not close or reduce
their operations. Even foreign equity investment
recorded a substantial net increase as they chased
profits on a fast rising stock market.
117. To be sure, some external factors helped a great
deal. The hedge funds have beaten a hasty and forced
retreat after the LTCM fiasco. Their backers and
bankrollers have become much more cautious.
118. The currency stability in East Asia and the
economic recovery of the East Asian economies has been
a great help.
119. We were and are fortunate that no-one has
followed or said that they intend to follow Malaysia's
example. A heretic can be tolerated. But a heresy
cannot. We would have been punished by global
capitalism and by the powers that be had we spawned an
intolerable heresy.
120. We are thankful for some external developments.
But the fortuitous external factors detract not one jot
from what we have been able to achieve on our own.
121. I cannot lavish enough praise on the experts and
technicians whose commitment to Malaysia and belief in
Malaysia never wavered and who made sure that there
were no devils in the details.
122. Last but by no means least, I must fully
acknowledge the pragmatism, the unity and the will of
the Malaysian people -- from the worker to the
entrepreneur, from the farmer to the civil servant --
all of whom knew that we were fighting for our life,
who found the will and the way to stay united, to work
and to fight together on the same team for the common
objective of rapid national recovery.
123. They are Malaysia's greatest secret of success.
I salute them.
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