Capital controls work as 'shield' for KL

Capital controls work as 'shield' for KL

LONDON (Reuters): Capital controls imposed at the height of
last year's emerging markets crisis will help shield Malaysia
from the current Brazil-inspired turmoil, a Malaysian minister
said on Wednesday.

Second Finance Minister Mustapha Mohamed, in London on his way
to a meeting of Asian and European Union finance ministers in
Frankfurt, said Malaysia's basic policy on controls would remain
in place, but the country would continue to consider ways of
easing them slightly to encourage more foreign investment.

"What's happening in Brazil is a good lesson. We've got to
manage our economy and make sure we insulate ourselves,
especially for small economies like Malaysia," Mustapha told
reporters.

"If we had not had these capital controls, the situation would
be relatively bad for us. With controls in place we are
insulated."

Brazil was forced effectively to devalue its currency on
Wednesday as millions of dollars flooded out of its foreign
exchange markets, reflecting fears that a political row could
scupper a crucial austerity program and a $41.5 billion
international support package.

Malaysia clamped capital controls on its markets at the
beginning of September 1998, to shield its battered ringgit
currency and economy from a similar exodus of "hot" money from
emerging economies after Russia devalued.

These included pegging the ringgit at a fixed 3.80 to the
dollar and slapping a ban on foreigners withdrawing the principal
of their portfolio assets from Malaysia within 12 months of
investment.

Malaysia has recently shown signs of preparing to relax at
least some of the restrictions. The central bank tinkered last
week with stock market controls, and an official said the
government was considering replacing the 12-month holding period
on investments with an "exit tax".

Mustapha, said the government was studying various
alternatives for easing the controls, such as an exit tax or
preferential treatment for certain long-term investors.

"We still worry there might be another speculative run on the
currency," he said. "What we are doing is fine-tuning the
implementation of these controls...These are adjustments. The
basic policy remains."

Mustapha said Malaysia was unlikely to suffer damaging capital
outflows in September, the earliest that investments frozen under
the 12-month holding period can be withdrawn.

He said only about 21-22 percent of Malaysia's stock market
capitalization was held by foreign investors, many of whom were
in Malaysia long term and had little reason to pull out.

The government was studying the amount of capital that might
flow out of the country as shorter term portfolio investors
withdrew their capital, he added.

Deputy central bank governor Zeti Akhtar Aziz said Malaysia's
foreign exchange reserves had grown by some $6 billion since the
controls were imposed.

"We expect reserves to continue to increase because of our
massive current account surplus," she said. "Even if there was an
outflow of funds we feel we could withstand that outflow."