SUNS  4299 Monday 12 October 1998


MALAYSIA: CURRENCY CONTROLS GET SECOND HEARING

Kuala Lumpur, Oct 9 (IPS/R Mageswary ) - The effects of Malaysia's five-week old currency controls are not yet entirely clear, but they are getting a second hearing after the initial round of dire
predictions by doomsayers.

Prime Minister Mahathir Mohamad declared capital controls aimed at curbing speculation in Malaysia's currency and stocks on Sep 1, saying the recession-hit country needed to protect itself from the ups and downs of unregulated financial markets.

From economists to investment gurus, many experts balked and said Mahathir's defiance of free-market orthodoxy would drive away foreign investors and lead the economy into further ruin.

But weeks after the announcement, the state of Malaysia's economy has not taken a sharp dive for the worst, though many will say it is not any brighter either.
Here, Malaysians have mixed reactions to the controls, aimed mainly at short-term capital flows.

"Even though economists are unsure whether the imposition of foreign exchange controls will be able to resuscitate the domestic economy to previous growth levels, most of them are willing to give
Mahathir a chance," said an economist here.

After the first round of scathing criticism, some economists are granting that some form of temporary, limited package of controls coupled with other reforms may well help developing countries weather currency storms.

From Washington, some economists attending the annual meetings of the International Monetary Fund and World Bank say the perception of Malaysia's currency controls could well be more serious than their real effect.

The package of controls includes limits on ringgit that can brought in and out of the country, requirements that non-residents buying stocks have to retain them or the proceeds from their sale for a year before remittance, and the repatriation of ringgit held outside the country.

But the Malaysian government has said the ringgit will continue to be readily convertible to foreign currencies for trade purposes and investment.

While some believe that the imposition of currency and exchange controls will provide the economy much-needed breathing space, others add it must be followed up with reforms in the banking and
business sectors to achieve the desired effect.

The strategy is simple, says economist Charles Santiago. By reverting to a fixed exchange rate against the US dollar -- which Mahathir fixed at 3.80 ringgit to the dollar -- exchange rate
volatility in the financial markets will be eliminated. "In fact it will spur the growth of domestic business by a decrease in interest rates, increase business expansion and profitability," Santiago
added.

Economists also say a more stable currency would help businessmen plan better. Santiago adds this will increase the productive capacity and growth of the economy which had taken a whacking in
the recent months.

Some say it was perhaps understandable that Malaysia decided to take more drastic action, since it was clear where the economy was headed after a year of using traditional economic prescriptions of high interest rates and deep budget cuts.

When Mahathir announced capital controls, the ringgit had lost approximately 40 percent of its value since July 1997. Exports had decreased by 11.2 percent in the first seven months of this year.
Unemployment is rising and expected to reach 6.7 percent this year, says the International Labour Organisation.

Likewise, the banking sector, construction and property development and tourism were badly hit, inflation was soaring and officials were worried about non-performing loans and business failures.

The economy, which in past years had been growing by 8 percent a year, formally fell into recession in the second quarter, shrinking by 6.8 percent.
The question to watch now is how long Malaysia plans to keep the controls -- some say six to nine months may be reasonable -- and what other changes it makes to try to strengthen the economy.

Malaysian officials also know the role perception plays in the international markets, which is why the government is bending over backwards to gain understanding from the rest of the world for its
drastic policy measures.

At the IMF-World Bank meeting in Washington, Malaysia's second finance minister Mustapa Mohamed pointed out that Kuala Lumpur's decision was not "unique" and that countries from the United States to Switzerland had resorted to some form of controls in history.

Perception is important since the government wants to continue to draw foreign money, when many investors are fleeing South-east Asia.

In its capital-flow forecast for the year, the Washington-based Institute of International Finance says private lenders are expected to pull out $32.6 billion more than they will bring into Malaysia, Indonesia, the Philippines, South Korea and Thailand.

Local economists say there may be some encouraging economic signs, but caution against overoptimism at this point. For example, the government recently reported that Malaysia has a favourable balance of payments with a current account surplus of $1.74 billion.

However, cautions Santiago, this is because exports decreased by 11.2% in the last seven months and imports by 27.5 percent. "Imports are down partly because of government dictates, but the
purchasing power of Malaysians has also decreased. Things are looking good, but only for now," he explained.

Political analyst K.S. Balakrishnan says capital controls will work only if controls are limited in duration and is not an alternative to the reforms needed in the financial system.
While some officials swear that the currency controls will not be around for long, Mahathir has said that he sees no reason why they should not be permanent. He has also said he might devalue the
ringgit from its current rate if needed be, sending bankers scurrying to the central bank to clarity mixed signals.

The government has also cut lending rates since Sep 1, to try to stimulate economic activity. These should cause base lending rates at commercial banks to fall to 8.5 percent from 8.92 percent.

However, some economists feel the loosening of credit might be an indication that the government is not serious about reforming the banking system.