Black Markets Pop Up to Thwart Ringgit Controls
International Herald Tribune
September 15, 1998
Thomas Crampton

Just weeks after Malaysia announced tight restrictions on the ringgit, a black market in the currency has blossomed in the border towns of southern Thailand, threatening Kuala Lumpur's efforts to insulate its economy.

"Changing ringgit in Thailand will not be a problem once the formal controls are put in place at the end of this month," a Thai businessman, Somchai Udomlapsakul, told a government-sponsored conference here this weekend.

"The black market is already in place and if anyone has trouble finding it, I'll be happy to show them the way."

By halting the free flow of currency and capital, Prime Minister Mahathir bin Mohamad broke with free-market orthodoxy in an attempt to insulate Malaysia's beleaguered economy.

Countries throughout the region have been closely watching the progress of Mr. Mahathir's experiment, which directly contradicts conditions attached to multibillion-dollar International Monetary Fund bailouts of Thailand, Indonesia and South Korea.

The Fund and many analysts warn that currency controls are ineffective at halting a determined flight of capital.

[Moody's Investors Service Inc. cut Malaysia's credit rating to one notch above "junk" status Monday, Bloomberg News reported from Kuala Lumpur. The American ratings agency reduced the long-term foreign currency rating for bonds and notes to Baa3 from Baa2. It also downgraded the rating for bank deposits to the junk status of Ba1 from Baa3.]

Mr. Mahathir has insisted that the black market "can be controlled," appointing 400 officials to stem the flow of currency out of the country. The central bank issued stern warnings this weekend that money changers will lose their licenses if they hoard foreign currency or sell ringgit for a price lower than the government's fixed exchange rate.

But beyond the reach of Malaysian law, in Thailand, the black market has mushroomed, replacing all official channels of currency exchange.

The full range of restrictions on the ringgit do not take effect until Oct. 1, but banks and licensed exchange counters in Thailand already refuse to recognize the currency as legal tender.

Businessmen and tourists in southern Thailand instead use a network of black market counters that are thriving on moving money out of Malaysia.

Mr. Somchai, chairman of a construction company and chain of jewelry shops in southern Thailand, was one of many Thai executives who voiced confidence in the durability of the black market at a conference hastily organized by Bangkok to study the impact of Malaysia's capital controls.

While black markets are often tolerated as a means to ease the flow of trade, an exodus of ringgit to Thailand would undermine Mr. Mahathir's attempt to isolate his economy. The size of black markets, by their very nature, are difficult to estimate.

Thailand and Malaysia share a land border through the mountainous jungles on the Isthmus of Kra, and the economy of the southern provinces of Thailand is largely dependent on trade and tourism with Malaysia.

Malaysian tourists visited Thailand in larger numbers in 1997 than those of any other country, and they were the second-largest spenders, pumping an estimated 16 billion baht ($392.3 million) into the economy. Total trade between the countries is worth about $2 billion per year

"We panicked about the situation for three days," one prominent businessman said, "but then had discussions with the black market traders to work out a system for determining exchange rates."

The executive, who insisted on anonymity, sketched out the illegal route by which money is already being cycled out of Malaysia.

Using techniques employed by ethnic-based banking systems and money launderers, those participating in the black market have set up front companies in Thailand and Malaysia, he said.

Malaysians who want to transfer illegally large amounts of money out of the country deposit ringgit at a black market exchange company on the Malaysian side of the border, receiving a coded sheet of paper in exchange.

Leaving the country with an amount of cash well below legal limits, the Malaysian presents the coded sheet of paper to the corresponding black market company in Thailand and is given baht for the ringgit deposited in Malaysia.

"The exchange companies use the ringgit to buy cheap Malaysian diesel, which they smuggle into Thailand," the businessman said.

Copyright © 2006 the International Herald Tribune