Currency Speculators Are Not All Foreigners : Selectivity Fuels Attack By Malaysia
International Herald Tribune
July 30, 1997
Philip Segal 

As Prime Minister Mahathir bin Mohamad of Malaysia condemns "criminal" international speculators for the currency turbulence in the region this month, he leaves out some important information: the role of locals in undermining their own currencies.

He also neglects to mention that Malaysia's central bank was one of the world's most aggressive speculators in foreign exchange until it was badly burned in 1993.

While foreigners have certainly played a role in this month's falls in the currencies of Thailand, the Philippines, Indonesia and Malaysia, the region's local speculators and bad economic fundamentals are also important in explaining currency instability, analysts said.

"People think it's always nasty speculators, but the ultimate decision whether a currency realigns typically rests with onshore corporations," said an Asia-based economist with a European bank, who asked not to be identified.

Last week in Indonesia, "there was definite evidence of corporations hedging dollar exposure," he said, referring to domestic companies. That means companies that would eventually need dollars to pay debts or fund imports decided to sell rupiah as the local currency began to fall.

The rupiah plunged 7 percent on July 21, its largest ever one-day loss, after the central bank widened its trading band in response to de facto devaluations in Thailand and the Philippines and to weakness in the Malaysian ringgit.

Speeches such as Mr. Mahathir's are "a typical case of shooting the messenger," said Mehran Nakhjavani of the Bank Credit Analyst group in Montreal. "All the speculators are doing is exploiting a situation created by unwise policies."

In Malaysia's case, he said, these include the prospect of an increasingly unwieldy current-account deficit. Current-account shortfalls are normally encouraged in developing countries, provided they are sustainable and produce goods or services for eventual export.

But with Malaysia, Mr. Nakhjavani said, there has been excess investment in real estate, which may not in the end help the current account.

"A high investment rate is generally a good thing," he said, "but the lesson we learned from Japan in the 1980s is that it's possible to overinvest."

This month in the Philippines, the government allowed what many economists agreed was an overvalued peso to decline after being prompted to do so by the Philippines Exporters Confederation.

On the day the central bank felt pressured enough to let it fall, however, it was locals who probably started the speculation, as foreigners are not allowed to sell pesos in the forward market, said Malcolm Robinson, chief of a Hong Kong-based hedge fund. A currency comes under pressure when someone holding it promises to sell it at a lower rate weeks or months hence.

"Most foreigners don't have pesos to sell," Mr. Robinson said. "By deduction, it has to be the locals who were doing it."

In Thailand, traders say that only a third — and possibly just a quarter — of Thai companies with foreign debts have made commitments to buy the foreign currency they will need to repay those loans. The prospect of such an eventual demand for foreign currencies, principally dollars, might already be priced into the baht's exchange rate; or it might mean more downside risk for the baht in the months to come.

The singling out by Mr. Mahathir of George Soros, the Hungarian-born American international investor, for especially venomous remarks entails considerable background.

Mr. Mahathir said last week that Mr. Soros was the person he was referring to when he said "rogue speculators" were out to destroy Asian economies.

Mr. Soros denied through a spokesman last week that he had been the cause of Southeast Asia's currency turmoil.

Analysts in the region recalled that Bank Negara, Malaysia's central bank, was among those that bet against Mr. Soros in what proved to be his successful attempt to drive down the British pound in 1992. That incident took place during a two-year period in which Bank Negara ran up 15 billion ringgit ($5.73 billion) of currency-trading losses. The losses led to the resignations of Bank Negara's governor and chief dealer in 1994 and a promise by Malaysia that Bank Negara would take a more subdued approach to currency trading.

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