Malaysia Clamps Down On Currency Trading 
International Herald Tribune
September 2, 1998
Thomas Fuller

Malaysia effectively turned its back on the free market Tuesday, becoming the first Southeast Asian country hit by the regional economic crisis to clamp down on currency trading.

The government said Tuesday that the measures, including restrictions on foreign investors in Malaysia and a ban on the trading or deposit of ringgit outside the country, would insulate the domestic economy from the spreading global financial crisis.

"People can no longer stay with the so-called free-market system," Prime Minister Mahathir bin Mohamad said in introducing the measures. "They need to take some action which is contrary to the philosophy or the principles of the free market."

Zeti Akhtiar Aziz, the country's acting central bank governor, said the moves were taken to "minimize the impact of a possible global economic crisis and a breakdown in the international financial system."

The measures are a victory for Mr. Mahathir, who has called for currency controls since a meeting in Hong Kong late last year where he accused George Soros, the hedge-fund pioneer, of undermining Asian economies.

In the past two weeks, two other governments in the region stung by the crisis have intervened in their plunging markets. Hong Kong has spent billions of dollars to rescue its sagging share prices. And Taiwan last week made it more difficult to sell shares in its market.

But Malaysia's measures are far more comprehensive in scope.

The government has required that all Malaysian currency held abroad be repatriated before Oct. 1. That involves billions of ringgit that are currently traded or stored in bank accounts in financial centers such as Singapore and Hong Kong — money that the Malaysian government contends is being used for speculative purposes.

After the deadline, "ringgit held outside of Malaysia will not be legal tender," Mr. Mahathir said.

The Malaysian leader asserted that an estimated 20 billion ringgit ($4.73 billion) currently was held abroad, and that those funds would return to the country and help reflate a cash-strapped economy.

Malaysia has also limited the amount — in any currency — that travelers can take outside the country. Residents are now allowed to leave the country holding no more than the equivalent of 10,000 ringgit. Nonresidents can carry out only what they came in with. To help enforce this, Malaysia is doing away with large denomination bank notes. In addition, foreigners who invest in Malaysia would be required to keep their funds in the country for one year.

The measures are radical ones for Malaysia, a small nation that relies heavily on external trade. Its annual exports are the equivalent of more than 100 percent of its total output. The corresponding figure for the United States is less than 20 percent. The new rules would require all trade to take place in U.S. dollars and large transactions to be channeled through the central bank.

The central bank says it can enforce the ban on foreign use of the currency by penalizing any banks dealing in ringgit abroad.

The Kuala Lumpur stock market took the news badly, with the benchmark index tumbling more than 13 percent. The ringgit, however, rose against the dollar. Analysts said further rises were possible on the prospect that ringgit-holders abroad would rush to bring their money home before the Oct. 1 deadline.

Some areas of the new policy remained unclear. Mr. Mahathir said on national television Tuesday that a fixed exchange rate would be set soon. Bank Negara, the Malaysian central bank, said the rate would be determined by domestic market forces.

Analysts described the new rules as a test case for a region that is desperately trying to find ways to combat the worsening economic crisis. "Whether it's successful or not, I think all countries in Asia will be trying to introduce buffers into their capital account," said Marshall Mays, chief economist at Nikko Securities in Hong Kong.

Many analysts were critical of the move, saying the measures could frighten away "legitimate investors."

"I do sympathize with their motive and dilemma they are facing," said Guonan Ma, head of Asia-Pacific economic research at Salomon Smith Barney in Hong Kong. "The problem is that in real life it's difficult to differentiate between speculators and investors."

Added Mohamed Ariff, executive director of the Malaysian Institute of Economic Research: "These controls are aimed at insulating the ringgit from contagion effects and speculation. But in the process it may be isolating the whole place as well."

Analysts were not the only dissenting voices over the policy. The measures Tuesday were so controversial within Malaysia that the top two officials at the central bank resigned last Friday to avoid having to implement the policy.

The measures were announced by Mrs. Zeti during her first few hours officially in her post.

The notion of currency controls has its supporters, one of the biggest of whom has been Paul Krugman, an economist at the Massachusetts Institute of Technology.

"Extreme situations demand extreme measures," Mr. Krugman wrote in the most recent issue of Fortune magazine. Citing the example of China, Mr. Krugman said exchange controls gave Beijing "a degree of policy leeway that the rest of Asia desperately wishes it had."

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