Business Cautiously Approves of Malaysian Controls
International Herald Tribune
September 9, 1998
Thomas Fuller

When Malaysia became the first country in Asia to clamp down on currency trading last week, the move raised a basic question: Can a small, trade-dependent economy shut itself out from international currency markets and still attract foreign direct investment?

The verdict will not be in for months, but foreign companies with operations in Malaysia are coming to some cautious conclusions about the effects of the measures on their businesses, finding some benefits and waiting to see the impact on the local economy.

A number of foreign executives said that the controls added paperwork to their jobs but that a stable ringgit made planning easier.

Their findings are important not just for Malaysia but for other small countries around the world that might see Kuala Lumpur's controls as a tempting alternative to the vicissitudes of the free market.

After one year of currency volatility, Malaysia last week pegged its currency at 3.8 to the dollar and banned any trading of it outside its borders. The move angered many investors in Malaysian financial markets, who by some estimates have as much as $10 billion in the country.

"We've peeled it apart a million times," said Mark Stevens, vice president and controller for Dell Computer's Asia-Pacific operations, which assembles $1.1 billion worth of computers in Malaysia every year.

"There's a little bit more paper work to do," he said. "But it's really meant to attack the speculators," he said of the measures.

Those are words Prime Minister Mahathir bin Mohamad would love to hear.

The prime minister last week shut down trading of Malaysian shares in neighboring Singapore and told foreign shareholders in the Malaysian stock market that they could not pull their money out of the country for one year — all of this, he said, to foil speculators.

"Some people feel very strongly that these are isolationist moves," said Tom Freitag, group managing director in Malaysia of Ogilvy & Mather, the international advertising agency. "Other people feel that this is a very wise and great decision."

Mr. Freitag said the advertising industry could benefit from the measures if the economy picked up as a result. "The industry as a whole is down about 20 percent so far this year. Anything that can fuel a feel-good factor is going to help."

Foreign investors have been the motor of Malaysia's economy over the past decade. The country received one of the highest levels of foreign investment in the region during the boom years, mainly because of liberal rules on investment, relatively high education levels and good infrastructure.

In clamping down on currency trading last week, Mr. Mahathir seems to have gambled that he could alienate the foreign stockbroking and currency trading industry while making foreign companies that contribute to the real economy feel at home.

Paradoxically, Mr. Mahathir pointed Tuesday to the stock market's performance in the past week as proof of the success of the currency controls.

"The stock market has been very good, people have regained confidence as more loans are available," he said. "The economy is picking up and they are happy with it."

Before a plunge of 21.5 percent Tuesday, the Kuala Lumpur stock market had risen nearly 70 percent since currency controls were imposed last week, unheard of in recession-hit Southeast Asia.

Other foreign companies that say they could benefit from last week's measures include Coca-Cola Co. "If the new policies help to improve the local economy and help grow local businesses," said Robert Harland, head of corporate communications for the company in Asia, "then they will clearly have a positive impact on us."

But by imposing restrictions on capital flows, Mr. Mahathir may be hurting some of the "legitimate" business that he hopes to foster in the country.

The head of a foreign-run software company in Malaysia said the measures had wiped out his chances of seeking financing abroad, a move he had planned to make later in the year. Foreign financiers will be loath to invest in an environment where they are not sure when and if they can get out, he said.

"Malaysia went overnight from one of the most open, freewheeling economies in the world," he said, "to being like Eastern Europe in the old days."

On the plus side, the measures have brought exchange rate stability, foreign executives said, at least for the short term.

"It just makes it easier to plan," said Mr. Stevens of Dell.

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