Mahathir says capital controls working

Mahathir says capital controls working

KUALA LUMPUR (Reuters): Prime Minister Mahathir Mohamad said on Saturday that Malaysia's two-month-old capital controls had been more successful than expected but the recession-hit economy had not yet really recovered.

In an interview with Reuters, Mahathir said he expected share prices on the Kuala Lumpur Stock Exchange to rise steadily now that the controls were in place but not to reach the heights they commanded before the downturn struck last year.

The 72-year-old prime minister, who will host the annual Asia Pacific Economic Cooperation (APEC) summit in mid-November, said Asia's financial crisis had set back efforts to speed up trade liberalization.

"Yes, people are now rethinking whether liberalization would actually bring benefit to them," he said. APEC is expected to debate proposed trade liberalization plans.

"What they see is an attempt to depress the value of companies here and then pick them up at very low prices and then control those companies, maybe revive them or maybe strip the assets.

This is not the kind of thing that we foresaw when we were thinking about liberalization."

Several dozen police carrying automatic rifles were guarding the hotel where the interview took place.

The building is located in an area of the capital where supporters of detained former finance minister Anwar Ibrahim had vowed to demonstrate on Saturday.

Anwar was sacked on Sept. 2 and arrested 18 days later. He has pleaded not guilty to 10 counts of sodomy and corruption, and his trial was due to start on Monday.

A water cannon truck and several riot police trucks were parked near the hotel, and a helicopter patrolled the sky above the city. There were no reports of protests.

Mahathir said capital controls were a short-term approach to combating the economic crisis but that Malaysia would not scrap them unless currency speculation was checked.

Asked to assess the impact of the controls, Mahathir said: "So far it has been better than what we expected, especially in terms of the increase in the (foreign exchange) reserves, although of course the economy has not really spurted again."

Mahathir said Malaysia wanted leaders attending the APEC summit to focus on curbing currency speculation as a solution to the region's economic crisis.

"Having to fix the exchange rate is not a real solution. But we need to control currency traders so that they can do less damage to other people," he said.

"We had no capital controls. We were doing very well until the currency traders come in. Obviously it is the currency traders which is the problem and we have to resolve that. Then we can go back to the old system."

Mahathir said he thought people had begun to adjust to the controls, which have allowed the central bank not only to peg the ringgit against the dollar but also to push down interest rates.