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WPost: Update on Malaysia controls (fwd)
Is Malaysia's Reform Working?
Capital Controls Appear
to Aid Economy, but Doubts Remain
By Paul Blustein
Washington Post Staff
Writer
Saturday, November 21,
1998; Page G01
KUALA LUMPUR, Malaysia—It
has been 2 1/2 months since Malaysia
shocked world financial
markets by slapping strict controls on capital
flowing in and out of the
country -- and to hear Malaysian tycoon
Francis Yeoh tell it, the
move is already paying off handsomely in
businesses like his.
Instead of backfiring as
the proponents of economic globalization at
the International
Monetary Fund and U.S. Treasury had not-so-secretly
hoped, the controls are
saving Malaysia from being destroyed by the
Asian financial crisis,
according to Yeoh, managing director of YTL
Corp., one of the
country's biggest conglomerates.
"Interest rates have come
down, from 11 percent to 7 percent. Banks
are suddenly starting to
do business. The stock market is improving,"
said Yeoh, whose cement
plant, he added, is benefiting from a revival in
infrastructure spending.
"There's confidence in home-buying now, too.
Suddenly I get 3,000
people queuing to buy houses at a project of mine."
The question for
Malaysia, though, is whether that rosy glow on some
sectors of the economy is
a real indication that its vital signs are
improving or just the
temporary result of a palliative that will do more
harm than good in the
long run.
Many analysts are betting
that Malaysia will eventually rue the
decision, which stemmed
in part from Prime Minister Mahathir
Mohamad's outrage over
currency speculators driving down the value of
the nation's currency,
the ringgit.
Malaysia, which had
thrived over most of the past decade by welcoming
foreign investment, has
been among the countries hard hit during the
past year and a half by
the sudden withdrawal of speculators and other
investors from the
region's stock and currency markets.
Mahathir has established
himself as a leader among the critics of
unfettered global markets
and the IMF's orthodox economic
prescriptions. The IMF
and the Clinton administration are eager to
discourage other
countries from following his lead in imposing
controls, arguing that
doing so would damage their chances to attract
new investment and
achieve a lasting recovery.
Accordingly, a lot is
riding on which side is right about whether
Malaysia's controls are
working.
"The danger is Mahathir
will look good for six or nine months, and then,
just as the whole thing
starts falling apart, people in the region will be
saying, 'Mahathir's
approach works, and the IMF's doesn't,' " said Robert
Manning, an Asia
specialist at the Council on Foreign Relations.
The controls have enabled
Malaysia to adopt a stimulative economic
policy -- including tax
cuts and sharply lower interest rates -- without
worrying that traders
would dump the ringgit. That's because under the
controls, it's illegal to
withdraw money from Malaysia in less than one
year; moreover, the
government has fixed the exchange rate at 3.8
ringgit per dollar and
prohibited the holding of ringgit overseas.
Critics contend that
Malaysia, free for now from the discipline imposed
by the currency markets,
is adopting all manner of policies that only
exacerbate fears about
its propensity for grandiose projects and
weaknesses in its banking
system. Along with the low-interest-rate
policy, the authorities
have ordered banks to expand lending by 8
percent a year and eased
the rules on reporting bad loans.
"Capital controls might
have been positive if Malaysia used the
opportunity to buy time
for itself to restructure the banks, or
restructure the
corporations," said Tan Min Lan, an economist at Merrill
Lynch & Co. in Singapore.
"But at this point, you can't say with
confidence that this
window of opportunity is doing them any good."
According to Douglas
Paal, president of the Asia Pacific Policy Center,
Mahathir is desperately
trying to pump up the economy until next year,
when elections are
scheduled, because "he's locked in a major power
struggle" with his
popular former deputy, Anwar Ibrahim, who favors
more conventional
economic policies and is currently being tried on
corruption and sex
charges.
"Where will they be a
year from now, when people can take their money
out of the country?" Paal
said. "The economy will be like a balloon
popping."
Malaysian officials
counter that such doomsaying exaggerates the
nature of the controls.
The controls, they say, are not intended to cut
the country off from the
world economy and were imposed only because
other approaches proved
inadequate at stopping Malaysia's economic
free fall.
The controls, according
to Zeti Akhtar Aziz, the deputy governor of
Malaysia's central bank,
are "designed to achieve the specific objective
of containing speculative
capital." They should pose no concern for the
sorts of long-term
investors Malaysia wants, she said, particularly
foreign manufacturers
whose factories helped turn the country into one
of the world's
fastest-growing during the early part of the decade.
And Mahathir, in a news
conference this week, said proudly that since
the controls were imposed
the government's reserves of foreign
currencies have risen by
about $4 billion. Even critics concede that this
probably means people are
keeping their money in the country, defying
predictions that the
controls would spark illegal capital flight.
"Sales of cars, sales of
houses have picked up," Mahathir added. "The
economy is now turning
around."
But economists say the
evidence so far is spotty and inconclusive, and
many are skeptical that
demand is rising. In Kuala Lumpur's colorful
Indian and Chinese
shopping districts, interviews with retailers
suggest that the
government's new policy certainly isn't spurring
spending across the
board.
"Everywhere, business is
down," grumbled Kamal Marican, manager at a
jewelry shop, who
estimated that customer traffic has dropped by 15
percent since controls
were imposed.
Moreover, while
Malaysia's interest rates have fallen and its stock
market has risen over the
past 2 1/2 months, the figures aren't as
impressive as in
neighboring countries that are following IMF
prescriptions -- notably
Thailand, where rates are even lower and
stocks have risen
further.
The real test of controls
will come in the future, when investors decide
whether to put money
again into a country that turned on them.
"They've shot themselves
in the foot. We would definitely be very
cautious about going back
in," said Stuart Goh, an investment manager
at Pacific Asset
Management in Singapore, which sold its holdings of
Malaysian bonds shortly
before controls were imposed.
"The thought that your
money might be tied up for a year is not
pleasant," Goh said. "We
would still look at Malaysia, because it does
have good economic
fundamentals. But this 'event risk' suggests that
the policy changes they
have can be pretty abrupt."
As for foreign
manufacturers, many say the controls are a bureaucratic
nuisance rather than a
serious impediment to doing business in
Malaysia, given the
country's high-quality, low-cost work force.
Still, some big foreign
companies with large operations in Malaysia
may pull in their horns,
not because they feel threatened by the
controls but because they
doubt the economy will respond.
"It's a very positive
place to be from a manufacturing standpoint," said
said Dick Warmington,
head of Asia-Pacific operations for
Hewlett-Packard Co. "But
at this point, we're not planning on expanding
our staff and
organization. . . . Even though they're trying to prime the
pump with lower interest
rates, it's our viewpoint it isn't going to do
much to stimulate growth
in our area."
U.S. officials are
scrupulously avoiding demonizing Mahathir on the
capital-control issue, in
part because they admit he has a point -- the
global monetary system is
in need of changes to reduce its tendency to
volatility. Malaysia has
even been invited to join the Group of 22, an
informal group of
countries that Washington convened to consider
improvements to the
global financial structure or "architecture."
Mahathir, meanwhile, is
showing signs that he realizes he has embarked
on a risky course.
"Many great economic and
financial minds seem to think we have done
something that can damage
the process of liberalization and
globalization of the
world financial system," he said last Sunday.
"We cannot. We are too
small. Why not leave Malaysia alone with its
idiosyncrasies. If we are
wrong, then we will pay the price. It would
serve us right. But the
world would have learnt something and be better
off for it."
© Copyright 1998 The Washington Post Company