Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : THE ASIA SOCIETY DINNER IN
NEW YORK, USA
Tarikh/Date : 27/09/99
Tajuk/Title : FINANCIAL STABILITY THROUGH
EXCHANGE CONTROLS:
MALAYSIA'S EXPERIENCE
I am pleased to be here tonight among
distinguished guests and experts and I feel honoured to
be asked to talk about Malaysia's own experience in
maintaining financial stability through selective
currency or exchange controls. Before I proceed with
my talk, I would like to thank the organisers, the
Asia Society for inviting me to speak at this occasion.
2. Since July 1997, Malaysia and a number of
Southeast Asian economies together with Korea have been
afflicted by such a severe financial crisis that it has
destroyed the Asian tiger image of our countries.
Nevertheless, we are now back on different levels of
the recovery path after implementing stabilisation and
structural adjustment measures. As is well known,
Malaysia adopted a home-grown set of policies and
strategies as enumerated in the National Economic
Recovery Plan (NERP) that was launched in late July
1998.
3. Since independence Malaysia had managed its
economy and finances relatively well. We did not
depend on foreign aid nor did we borrow much from
foreign sources, neither the Government nor the private
sector. We therefore believed that we would not get
into the kind of trouble that Thailand or the Latin
American countries often suffer from.
4. Unfortunately the currency traders did not spare
us. They only saw opportunities for making vast sums
of money by deliberately devaluing our currency. Many
believe that the finances of a country must be weak
before the currency can be devalued. Actually whether
the financial situation of a country is good or bad is
quite irrelevant. Even corruption, nepotism or
cronyism are not factors contributing to the
devaluation of a currency. It should be remembered
that the countries of Southeast Asia were growing at
very high rates economically. Corruption, nepotism,
cronyism and lack of transparency were all there all
this while that the economies were achieving their so-
called 'miracles' and becoming 'tigers' and 'dragons'.
Their currencies fluctuate minimally and harmlessly,
never affecting their economic performance.
5. The currencies only devalued rapidly when the
currency traders started short-selling them. The
traders were not in any danger of losing money because
they never had and never bought the currencies. When
they want to trade, all they do is to borrow the
currency and sell it, so that the currency devalues.
Then when the currency devalues further they would buy
and deliver to their earlier buyer making a
considerable amount of profit as they deal in very
large sums of money. Their leveraged funds were
unlimited and it was futile for Central Banks to buy
all that the traders were selling. Central bankers who
tried to defend their currencies invariably lose all
their foreign exchange reserves and were landed with a
lot of their own much devalued local currency.
6. Clearly the currency traders can attack any of the
developing countries, especially those which are doing
well like the so-called 'Asian Tigers'. It was not
their weakness which precipitated the attacks.
Observers must notice that they never attack poor
countries however weak their finances may be. It is
not because they are being kind, but because there is
no money to be made.
7. I am sure all of you know how currency trading is
done but I have to relate the process because people
talk of devaluation as if currencies have sensors and
can detect when the Governments are corrupt, nepotistic
etc. When they do they seemingly devalue themselves.
You know they don't. Some people do that and the
people are the currency traders out to make fortunes
for their rich investors.
8. Malaysia had some experience in currency trading
but we confined ourselves to the currencies of rich
countries. We speculated. We never had enough or
could leverage enough in order to move the market in
the direction we wanted. When Britain failed to join
the European Monetary Union we lost almost two billion
Ringgit. We got out but we learnt valuable lessons
which stood us in good stead when our Ringgit was
attacked by currency traders. We knew what they were
doing and how they were doing it. We studied their
activities closely and were finally able to frustrate
them and save our currency.
9. Initially we thought of countering the currency
traders impoverishment of our country and people by
increasing the incomes of all our people. This
involved putting more money into circulation. In
effect it would be the classic approach of countering
inflation by devaluing the currency - only it would be
the other way round. But it would not stop the
currency traders from devaluing the currency further or
even revaluing it upwards. We could not be chasing the
fluctuations in the currency values, as we cannot
reduce the currency in circulation as easily as we
would increase. We cannot print money and then destroy
it. And so we rejected the idea.
10. But the currency traders were still devaluing our
currency and impoverishing our people. We had to do
something even if it was only palliative.
11. We set up what we named the National Economic
Action Council with members from both the private and
public sectors. The problems faced by both sectors as
a result of the downturn were aired and discussed in
order to find solutions. Briefings on the current
economic situation in the country and among neighbours
kept us posted as to what is going on and what possible
solutions could be formulated.
12. An Executive Committee of seven pored over
economic data daily and decided on actions to be taken
to prevent the economy from collapsing and to
rejuvenate it. Thus the unemployment rate was
minimised, inflation kept low, sales of goods, motor-
vehicles, houses, shops were stimulated, interest rates
lowered and enough money made available to the banks;
imports were reduced while exports were increased. We
watched the balance of trade as it turned in our
favour.
13. We implemented scores of schemes to minimise the
effect of the Ringgit devaluation and the fall in share
prices. We estimated we lost about 50 billion US
Dollars in terms of purchasing power of imports and 150
billion US Dollars in market capitalisation. We could
not afford to have the currency devalued further and
the stock market raided. We had to put a stop to the
slide or we would have to turn to the IMF for loans and
surrender our control over our economy.
14. Malaysia is a multiracial country where wealth is
not evenly distributed. In 1969 we had race riots due
to jealousies over economic wealth and political roles.
We devised an affirmative action programme and shared
the governing of the country with more of the
opposition parties. We succeeded in reducing racial
tensions and reduced politicking to the minimum so we
could concentrate on economic development. Our
strategy worked. The relations between the races
improved so much that even the severe economic turmoil
did not cause outbreaks of racial fights and quarrel.
15. The IMF wouldn't understand this. They would
force their standard formulas to be implemented. Banks
owned by different ethnic groups, a politically
sensitive matter, would be closed. Credit would be
tightened, interest rates increased and the NPL
percentage would be increased by shortening the period
of default. They would want to see companies bleeding
to death to show how sincere the Government is in
implementing their orders. Foreigners should be allowed
to buy shares unrestricted after the short-sellers had
reduced the share prices to one-tenth of their former
market value. The banks should be sold to rich foreign
banks again at fire-sale prices.
16. If the people suffer from unemployment and
inflation then they should blame the Government for
practising cronyism and nepotism in the past, for being
corrupt and not transparent. They should overthrow the
Government in order to create confidence for foreign
investors to buy up the local businesses. And so on
and so forth.
17. The financial turmoil had already undone most of
the success of the affirmative action. The IMF in its
usual uncaring way would worsen the situation further.
And there would then be race riots and prolonged
political instability. Then the foreign investors
would not come in because they would all be flying to
quality i.e. to Russia and Latin America where there is
a lot to be made by undermining the economies of these
nations.
18. Since the IMF is not an option for Malaysia, we
had to think of something homegrown. The only way for
the economy to recover was for the exchange rate of the
Ringgit to be stabilized and the stock market to be
protected from further attacks.
19. To stabilize the Ringgit it must be prevented from
getting into the hands of the currency traders. The
Ringgit has been made freely convertible for a long
time. A lot of Ringgits were held by foreigners who
could sell or lend without restriction. The attempt by
the Government
to prevent cash from being taken out of the country was
naive. Electronic transfers of funds across borders
and subsequent lending and sale made such restrictions
useless.
20. Singapore is the biggest currency trading centre
in Southeast Asia. The Singapore Government holds the
Ringgit as part of its reserves. To increase the flow
of Ringgits to Singapore where it was being lent to
currency traders for short-selling, the Singapore banks
offered very high interest rates. Malaysia could not
raise interest rates as this would kill our businesses.
And so large amounts of Ringgits flowed out of the
country leaving Malaysian banks without money to lend
to Malaysian businesses. With this both the banks and
the businesses became moribund.
21. To stop the currency traders from borrowing
Malaysian Ringgits and selling it down, the Government
declared that Ringgits outside the country in whatever
form i.e. Ringgits held in foreign accounts would not
be allowed to be repatriated to Malaysia one month
after the control was made official. This means that
banks in Malaysia may not transfer funds belonging to
non-residents in the account of foreign banks except to
Malaysian entities during the first month of control.
After that no transfers would be allowed at all.
Effectively this made Ringgits held abroad totally
worthless for purchases or for trade or exchange within
or outside Malaysia.
22. And so currency traders found themselves unable to
buy or borrow Ringgits in order to sell. Short-selling
was stopped and only the Malaysian Government could
determine the exchange rate of the Ringgit.
23. Many thought the Malaysian Government would push
up the Ringgit to its former level. This would have
made imports cheaper but it would also increase the
cost of Malaysian exports. We would have become very
uncompetitive against our neighbours. We chose an
exchange rate that was neither too high nor too low.
24. Malaysia had sufficient reserves and a big trade
surplus. We were able to earn enough foreign exchange
to pay for our imports. We could make available enough
foreign exchange to long-term investors wanting to take
out their profits or even if they wanted to liquidate
and take out their capital.
25. Short-term investors may take out their profits
but may only take out their capital after one year.
26. Far from seeing an outflow of funds, the positive
balance of trade resulted in foreign reserves growing
rapidly. There was never a time when there was
insufficient funds to pay for imports. The expected
black market in foreign currency did not materialise.
Instead the fixed exchange rate reduced the cost of
doing business in Malaysia as hedging became
unnecessary.
27. Reviving the share market was more complex.
Government had disallowed short-selling as soon as
attacks were mounted against the KLSE. It soon became
clear that share prices were still being pushed down
the way the currency was being devalued. Some people
were short-selling obviously, some very smart people
with an agenda that went beyond just profits.
28. When Malaysia decided that the Singapore Stock
Exchange should not trade in Malaysian shares, the
Singapore Government created an over-the-counter market
in Malaysian shares operated by a stock-exchange called
the "Central Limit Order Book". The Malaysian
Government never recognised this market. As far as
Malaysia is concerned it was illegal. Appeals to the
Singapore Government to close down CLOB went unheeded.
29. The unfortunate thing is that transactions through
the CLOB affected share prices on the KLSE. Whereas
short-selling could be stopped in Malaysia, it was free
to be done in Singapore. Share prices dropped so much
as a result that holders of shares could not meet
margin calls. Loans were defaulted and the companies
already in trouble because of the devaluation, high
interest rates and shortage of funds in the banking
system were deprived of funds completely. They were
all rapidly collapsing. And the banks were also in
distress.
30. CLOB was able to avoid registering changes in the
ownership of shares following trading by having all
shares registered in the name of nominee companies.
Thus while the transactions did not change the
ownerships of shares on the KLSE, the prices paid
affected share prices on the Malaysian index. Short-
selling through CLOB soon wiped out two-thirds of
market capitalisation, bringing the Composite Index
down from 800 plus to 262 on September 1st 1998.
31. To stop CLOB, registration through nominee
companies was disallowed. Owners of shares had to
register directly with the KLSE and trade in these
shares were stopped until the status of these shares
could be determined.
32. Almost immediately the share prices on the KLSE
picked up. The Composite Index gained rapidly until at
one time it registered an increase of almost 200
percent over the lowest figure in September 1998. The
companies and their Malaysian share holders were
relieved of unpaid loans as there was no more margin
calls. The collaterals matched the loans again.
33. Making the Ringgit worthless outside Malaysia and
stopping it from being brought back into the country
one month after controls were imposed resulted in a
massive inflow of the Ringgit. There was now
sufficient funds in the banks for the interest rates to
be lowered drastically without the money flowing out to
Singapore. Cheaper loans were thus made available to
the companies and for hire-purchases. Sales of motor-
vehicles and landed property picked up immediately.
34. When the Government was implementing the IMF
policy without the IMF, an attempt was made to have a
surplus budget by cutting back on Government
expenditure by 21 percent. Since 80 percent of
Government expenditure is on emoluments, cutting back
by 21 percent meant no development expenditure. The
result was a severe contraction in the construction
industry, a vital sector which contributed much to the
GDP. The building material industry also suffered very
badly. Trying to achieve a surplus as advised by the
IMF was a most unwise thing to do. It could not help
economic recovery. It merely worsened the situation.
35. When controls were implemented the Government
decided on a deficit budget and restarted all the
development projects. Almost instantly the
construction industry revived and helped the economy to
grow.
36. The controls were imposed in the last month of the
3rd quarter of 1998. It was too late to stop the GDP
contraction of - 6.3 percent in the last quarter. The
first quarter of 1999 saw a much smaller contraction of
- 1.3 percent. The second quarter saw a growth of 4.1
percent.
37. When we imposed controls we were vilified and
condemned by practically the whole world. We were told
our economy would be shattered as a black market in
foreign currency would undermine our controls. We were
called pariahs, idiots with no understanding of
economics and finance.
38. Now the comments are kinder. Even our most
virulent critics have admitted that we have succeeded
in overcoming our economic problems, that we are
growing again. Some even project better growth than we
do.
39. But now we are being advised to lift controls as
we are now stable. We are not about to do so, not
unless the world curbs the currency traders and design
an international financial structure that is less
liable to abuse by the avaricious.
40. I am trained as a medical doctor. I not only have
to cure my patients but also to advise them not to
expose themselves to a recurrence of the disease if
possible.
41. The currency traders, the highly leveraged funds
and the possibility of their attacking us is still
there. We will not lift our selective controls until
the threat is removed.
42. We are doing quite well and we are not doing any
harm to anyone other than the currency manipulators.
We only wish the world to know that there are many ways
to skin a cat. The idea that there is only one way to
tackle an economic problem is erroneous. So please
leave us and our selective controls alone. What people
think of us is not important to us. People have never
thought well of us at any time. What is important to
us is that we do well for our country and our people.
43. Thank you for listening to this tedious narration.
|
|