Jury still out on Malaysia's capital controls<\/p>\n
By Nelson Graves<\/p>\n
KUALA LUMPUR (Reuters): Miracle cure? Or plain luck?<\/p>\n
One year after Malaysia imposed capital controls, a debate
\nstill rages over their impact on the economy and political
\nlandscape.<\/p>\n
Prime Minister Mahathir Mohamad credits the controls with
\nsaving the nation -- and the rest of Asia -- from predatory
\nspeculators.<\/p>\n
Never one to duck a quarrel, plucky Mahathir relishes the
\ndebate which pits his government against global economic
\northodoxy and political adversaries, and casts him as David
\nagainst Goliath.<\/p>\n
Others are reluctant to give all the credit for Malaysia's
\neconomic volte-face to either the controls on capital flows or
\nthe fixed exchange rate.<\/p>\n
Mahathir's strongest critics accuse him of using the controls
\nto pursue a Machiavellian strategy against his political nemesis
\n-- jailed former deputy prime minister Anwar Ibrahim -- in the
\ninterests of business associates.<\/p>\n
They say the true impact will not be known until pent-up
\npolitical tension is released -- perhaps years from now.<\/p>\n
There is little doubt that Malaysia's economy has rebounded
\nsince Mahathir took the global financial world by surprise and
\nslapped controls on foreign exchange flows last Sept. 1.<\/p>\n
Economic indicators point to a resurgence of domestic demand
\nand production since the second half of 1998. Real gross domestic
\nproduct jumped by 4.1 percent in the second quarter, the first
\nyear-on-year increase in five quarters.<\/p>\n
Private consumption indicators show a strong rebound in car
\nsales, imports of consumption goods, service tax collection and
\nloan approvals.<\/p>\n
Manufacturing production surged by 10.4 percent in the second
\nquarter year-on-year, driven by strong external demand,
\nespecially for semiconductors and electronic components.<\/p>\n
Foreign exchange reserves have risen by 50 percent since last
\nSep. 1, inflation is moderate and interest rates so low that
\nsavers have started to gripe.<\/p>\n
Mahathir credits the controls for the turnabout. What is more,
\nhe says they helped set the foundation for Asia's recovery.<\/p>\n
\"We believe that the recovery of other East Asian economies is
\ndue to the currency traders stopping their manipulation of the
\ncurrencies,\" he recently wrote in Japan's Mainichi Daily.<\/p>\n
\"When Malaysia imposed controls, there was fear that the other
\ncountries might do the same if the attacks continued.\"<\/p>\n
Malaysia's government points to the 190 percent surge in the
\nKuala Lumpur Stock Exchange's benchmark index since Sep. 1 --
\namong the strongest rallies in the region behind Korea.<\/p>\n
But economists say Malaysia's rebound is in line with that of
\nthe region and cannot be attributed to capital controls.<\/p>\n
\"It is impossible to honestly claim the Malaysian recovery has
\nbeen either due to or despite the September 1998 measures as
\nproponents and opponents of the Malaysian controls have been keen
\nto claim,\" University of Malaya professor Jomo Sundram said.<\/p>\n
Dominic Armstrong, head of research for Singapore and Malaysia
\nat ABN Amro Asia Securities, likens Malaysia's economy to a
\nMalaysian Airline passenger jet which landed in London earlier
\nthis year low on fuel.<\/p>\n
\"The Malaysian economy, too, has had a safe landing. But if
\nthere had been any external shocks, it would have been ugly.\"<\/p>\n
The head of a foreign bank said Malaysia was helped by two
\nunexpected events.<\/p>\n
Five weeks after Malaysia pegged the ringgit to the U.S.
\ndollar, the American currency slid sharply against the yen,
\ngiving the ringgit a competitive edge that has helped the export-
\nled recovery.<\/p>\n
The near collapse of Long Term Capital Management Fund, the
\nlarge U.S. hedge fund that was bailed out last year by 14 banks,
\ncaused banks to curb lending to hedge funds, taking some
\nspeculative pressure off of other regional currencies.<\/p>\n
\"I think currency controls have worked, but more by luck than
\ngood judgment,\" a Western diplomat said. \"Malaysia has not been
\nthe master of its own destiny and can't buck the regional trend.\"<\/p>\n
The longer term implications remain unclear.<\/p>\n
Tan See Yunn of the Malaysian Institute of Economic Research,
\nwho defends the controls, said their sudden imposition had shaken
\nfund managers' confidence in Malaysia.<\/p>\n
\"This clearly shows capital controls come at a price,\" he
\nrecently wrote in the New Straits Times newspaper.<\/p>\n
Mahathir has shown no willingness to dismantle the controls or
\na levy on repatriated capital gains. The central bank says the
\nringgit peg will be adjusted only if fundamentals change.<\/p>\n
\"We do not think the repatriation levy is the factor that
\ndeters potential investors into the country,\" Bank Negara said
\nlast week, noting that the government might \"simplify further the
\nadministration of the system\".<\/p>\n
Sounding a dissonant note, The Star newspaper said this week
\nthat it was perhaps time to ease the controls, for example by
\n\"liberalizing\" the ringgit peg for hedging purposes.<\/p>\n
Mahathir's most severe critics do not question the economic
\nimpact of the capital controls so much as their use.<\/p>\n
Mahathir says the controls allowed Malaysia to buck the IMF's
\nprescription and bring down interest rates to stimulate growth.<\/p>\n
But his political adversaries, led by Anwar, say the
\ngovernment has used the controls to shield powerful businessmen
\nfrom the pain of restructuring. The same tycoons are still in
\nplace, protected by the government, they say.<\/p>\n
\"For the Malaysian authorities, capital controls have been
\npart of a package focused on saving their friends, usually at the
\npublic expense,\" Jomo said.<\/p>\n
Critics point to a plan to merge 58 financial institutions
\ninto six core groups, saying the project will punish Anwar's
\nallies and award those close to the government.<\/p>\n
The politically charged debate fans suspicions among foreign
\ninvestors, leaving a question mark hovering above Malaysia that
\nsome say will not go away until Mahathir and Anwar settle their
\ndifferences.<\/p>\n
Armstrong of ABN Amro, who is upbeat on Malaysia's economic
\noutlook, said: \"One of the factors that haunts Malaysia more than
\nany other market in Asia is specific political risk.\"<\/p>",
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