Policymaker Expects Action 'Very Quickly' to Reassure Investors : Malaysia Looks at Easing Controls 
International Herald Tribune
December 23, 1998
Alan Friedman and Thomas Fuller

Malaysia's leading economic official said Tuesday that the government planned to modify a key element of the capital controls imposed three months ago, which triggered an international debate over how emerging economies should protect themselves against speculators.

Daim Zainuddin, Malaysia's de facto finance minister, said in an interview Tuesday that he was pleased with the results of capital and currency controls introduced last September and which were widely criticized in the West. He said, however, that the government would act "very quickly" to reassure international investors by modifying conditions related to the withdrawal of foreign money from the country.

Foreign portfolio investors, who hold an estimated $10 billion in Malaysia, were angered by Malaysia's decision to ban the withdrawal of capital from the country for a period of one year from the time they were imposed.

Mr. Daim, 60, said the government was studying two main proposals to replace that rule, which was designed to discourage speculative short-term capital flows.

The government was considering replacing the one-year freeze with an "exit tax," a more flexible and less punitive system than the straight ban on outflows. The other option, Mr. Daim said, would be a system of "most-favored investors," which would allow investors judged to have a long-term interest in the country more freedom to move money in and out.

"These are the options we are looking at," said Mr. Daim, who is Prime Minister Mahathir bin Mohamad's closest adviser. "We hope to imple-ment one of them as soon as possible. We want to move very quickly and settle this once and for all."

Malaysia's plans come amid signs that foreign money is coming back into East Asia — money that Kuala Lumpur does not want to miss out on. Since September the stock market has recovered dramatically here as well as in places like Hong Kong and Thailand.

Ironically, many investors who were furious when their money was trapped in September have seen their Malaysian portfolios almost double. If the ruling is changed in the next few weeks — and indications are that it may — investors will be able to withdraw a lot more money than would have been the case had the government allowed them to liquidate earlier.

Mr. Daim, who as finance minister a decade ago helped lead Malaysia out of its last recession, has been instrumental in steering the economy of late, and is considered the country's top policymaker after the prime minister.

The one-year rule was introduced in September as a direct reaction to the massive capital outflow that accompanied the early stages of the regional economic crisis last year.

Malaysia's stock market, which before the crisis was one of the region's biggest, had lost about $160 billion in paper value by August, reducing it to about a third of pre-crisis levels. Since then, the market has recovered dramatically, with the main Kuala LumpurComposite Index doubling.

The package of controls, which the government insists are temporary measures, has been presented as an alternative to IMF-restructuring plans now in place in neighboring Thailand and Indonesia.

As part of a package, Malaysia cut interest rates and banned trading of its currency overseas, pegging the ringgit at 3.8 to the dollar.

The controls drew criticism from top officials at the U.S. Treasury, although the International Monetary Fund on Monday declared that the controls had "neither hurt very much nor helped very much."

"Why are people so concerned?" Mr. Daim asked on Tuesday. "I think the biggest fear is that if we succeed, others will copy." So far, the government says the controls have yielded positive results. The central bank's foreign reserves, Mr. Daim said, are up by nearly $5 billion to $25 billion, while the current-account balance has registered a healthy surplus, imports are declining, and exports are creeping up.

Critics of Malaysia's controls say these trends are also occurring in countries that have not imposed capital controls, and that by keeping Malaysia's economy artificially sheltered, it could face problems later on when controls are lifted.

When asked whether Mr. Mahathir was likely to appoint a new deputy prime minister to replace Anwar Ibrahim, who was dismissed in September, Mr. Daim said, "Yes, although he would prefer to let members of his party elect one."

Asked to comment on the IMF's latest forecast that Malaysia's economy would contract by 7.5 percent this year and by 2 percent in 1999, Mr. Daim offered his own forecast, of a 6 percent contraction in 1998 and of a small recovery during the course of next year.

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