Malaysia loosens capital controls (fwd)

[Robert Weissman <rob@essential.org>]

Malaysia loosens capital controls
>From IAN STEWART in Kuala Lumpur

The Australian (News Ltd. Newspaper)
5 Feb 99


MALAYSIAN Finance Minister Daim Zainuddin yesterday announced
the introduction of a graduated levy or exit tax on foreign investments
in Malaysian stocks, which represents an easing of the capital controls
 introduced on September 1.

"The new policy will allow portfolio investors to repatriate their capital
and profits, as well as encourage new capital inflows," he said.

Foreign investors, who account for about 23 per cent of the market
capitalisation of the Kuala Lumpur Stock Exchange, will be able take
 their money out if they are willing to pay a levy of up to 30 per cent.
Previously, their capital and profits were locked into the market for
a year. For new investments from February 15 a profit tax will apply.

But Malaysia will continue to peg the ringgit at 3.80 to the US dollar
and prohibit overseas dealing in its currency.

Malaysia's move was generally welcomed by foreign fund managers.
Analysts expect some foreign investors will now take a friendlier look
 at the Malaysian market, which major funds have been avoiding.

If so, Prime Minister Mahathir Mohamad will have reason to feel
vindicated for bucking conventional economic theory in the wake
of the regional economic crisis. He dumped his finance minister
and central bank governor and followed a path designed to protect
Malaysia from "greedy" foreign speculators and the questionable
 programs of the International Monetary Fund.

The imposition of capital controls last September and subsequent
 appointment of Abdullah Badawi, the former foreign minister, as
Deputy Prime Minister have restored a sense of economic and
political stability that was missing as Dr Mahathir fought with his
former deputy, Anwar Ibrahim, over financial policy and then
sacked him. Anwar is being tried on charges of corrupt practices,
which he denies.

The KLSE index, which reached a low of 261 at the beginning of
September, closed yesterday at 578. This represents an increase
 in market capitalisation from $M181 billion ($75.4 billion) to
$M400 billion. Consumer confidence is returning, with car sales
 recovering and some renewed interest in the housing market.

Mr Daim said the levy was aimed at encouraging portfolio
investors to take a longer term view of investments and
"discourage short-term flows".

Funds brought into the country before February 15 will be
subject to a levy of 30 per cent if they are taken out within a
period of seven months from September 1, 1998. The levy
falls to 20 per cent if the period is nine months and to 10 per
cent if it is 12 months.

Repatriation of profits made during the 12-month period will not
be taxed but subsequent profits will be subject to a repatriation
levy of 10 per cent.

The principal of funds brought in after February 15 may be
repatriated at any time without a levy but profits will be subject
 to a 30 per cent tax if taken out within 12 months from when the
profit was made. After the 12-month period a 10 per cent tax on
 profits will apply, bringing old and new funds on to the same
taxation scale.