Mahathir's $20 Billion Market Cure
International Herald Tribune
September 4, 1997
Thomas Fuller

After weeks of trying to bolster Malaysia's slumping stock market by cajoling investors and threatening speculators, Prime Minister Mahathir bin Mohamad announced Wednesday that the government would inject up to $20 billion into the market to support share prices.

"This is our plan to defend our economy," Mr. Mahathir said after the stock market closed down 5.65 percent for the day, continuing a slide that has shaved off more than 40 percent of the market's value since March. "We are trying ways to save our country."

But analysts immediately questioned whether the 60 billion ringgit rescue plan — roughly equivalent in value to Malaysia's entire annual federal budget — would work.

They also noted that deploying that much money was likely to drastically reduce the liquidity of Malaysia's financial system, drying up investment capital and possibly harming the economy. The plan, Mr. Mahathir said, would be financed partly by issuing bonds through Khazanah Nasional Bhd., an investment agency attached to the Ministry of Finance, and partly through other unnamed local institutions.

"You can't actually take 60 billion ringgit out of the money market all at once," said a researcher at a Kuala Lumpur finance house who asked not to be identified.

"And even if you take the money out over the next four to eight weeks, you're going to see liquidity dry up and interests rates rise."

But Mr. Mahathir was confident that the plan was viable. "We have enough money to do this," he said. "There is no problem raising money in Malaysia. It can come from many sources." The state-run Employees Provident Fund had more than 100 billion ringgit, he added.

Analysts and brokers in Malaysia were reluctant to comment on Mr. Mahathir's announcement, fearing retaliation.

Analysts at two different firms here cited a mood of "paranoia" following press reports that officials might use Malaysia's Internal Security Act against any foreign traders believed to have aided foreign speculators in depressing the market.

In London, foreign fund managers said that the plan would only further erode international confidence in Malaysia, which was shaken last week when short-selling of blue-chip shares was banned.

"It is not going to work, it is nonsense," Edmund Harriss at Guinness Flight Hambro Asset Management in London told Reuters.

"There are enough people willing to sell that that 60 billion ringgit will disappear relatively quickly," said Hugh Hunter, a fund manager at LGT Asset Management in London. "The measures Mahathir is coming up with are increasingly desperate. The only way the market will rise is if there is broad confidence. That will only happen if he begins to pay attention to the economic fundamentals."

Mr. Mahathir last week urged local pension funds to buy up shares. And in a weekend National Day address, Mr. Mahathir called on all Malaysian citizens to show their patriotism by supporting the stock market.

The market's fall Wednesday was accompanied by another drop in the ringgit, which fell to an all-time low of 2.986 against the dollar. The Malaysian currency has slipped over 15 percent since July 2, when the Thai baht was effectively devalued.

Other Southeast Asian currencies, led by the Thai baht, also plunged to record lows against the dollar Wednesday as the region's monetary crisis began its third month with the bottom far from view.

Early in Mr. Mahathir's stock market crusade, he had urged local investors that it was the "best time to buy shares." That was Aug. 7.

The market continued its slide in subsequent weeks and other measures were announced: Companies were told they would be allowed to buy back their shares, and last week the stock market's rulebook was changed, shortening settlement times and instituting the ban on blue-chip short-selling.

The rule change hit foreign institutions particularly hard because of their need to get access to funds abroad.

Wednesday's announcement, too, set out different rules for foreign and domestic investors. Shares sold by local investors would be bought by the government "at a premium," Mr. Mahathir said, while foreigners would receive a "market price." The prime minister did not elaborate on the plan and analysts said they were not sure how it could be implemented.

Mr. Mahathir repeated Wednesday his attack on foreign speculators, blaming them for the market's slide. "I say openly, these people are racists. They are not happy to see us prosper," he said. "They say we grow too fast, they plan to make us poor. We are not making enemies with other people but others are making enemies with us."

Although brokers and dealers privately expressed their anger and bewilderment at the spate of regulations and pronouncements, many expressed fear of retaliation for speaking out.

As stocks, bonds and currencies have tumbled across Asia in recent weeks, governments have increasingly blamed foreign securities firms and their analysts .

Earlier in the week the Association of Stockbroking Companies passed a resolution seeking to "flush out manipulators." Present at the meeting was a government minister, who said analysts and writers who wrote negative things about the economy should be fired by their employers, The Straits Times reported.

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