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damaging capital outflows in September, the earliest that investments frozen under the 12-month holding period can be withdrawn.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."