Malaysia controls could backfire: IMF

Malaysia controls could backfire: IMF

KUALA LUMPUR (Reuters): The International Monetary Fund on
Tuesday lauded Malaysia for its open trade regime but said
capital controls could backfire, leaving the country vulnerable
if its export markets begin to dry up.

The IMF, in a paper presented at a business conference in the
capital, said Malaysia's openness to trade was exceptional by
regional standards.

It said Malaysia's exports represented 95 percent of gross
domestic product (GDP) in 1997, far higher than export-to-GDP
ratios in Indonesia (30 percent), South Korea (38), the
Philippines (40) and Thailand (47).

However, the IMF said Malaysia was particularly vulnerable if
world economic activity turned out to be weaker than anticipated,
noting that the risks to current world economic growth forecasts
"appear to be predominantly on the downside".

"Weaker world activity would dampen demand for Malaysian
exports, and by potentially considerable amounts," the IMF said
in the paper, presented by Kanitta Meesook, division chief of the
IMF's Asia and Pacific Department.

"An even greater source of external vulnerability is a
potential drop in export prices."

It said for every one percent less output in Malaysia's major
trading partners, Malaysia could suffer a $1 billion decline in
merchandise exports.

The nominal value of Malaysia's exports could fall by $2
billion for every five percent drop in export prices.

Malaysia's current account balance would in turn worsen as its
fixed exchange rate and capital controls leave little room for
policy options to offset declining demand, it said.

"Malaysia's current monetary and exchange arrangements better
insulate the economy from short-term financial market volatility,
but could magnify the impact on the domestic economy of adverse
developments in Malaysia's export markets," it said.

The IMF repeated its familiar criticism of Malaysia's capital
controls and said political turmoil had damaged investor
confidence.

"Sweeping changes at the highest level of political and
technocratic leadership also have contributed to perceptions of
policy unpredictability and high country risk," the IMF said.

"In the absence of external financing, the envisaged fiscal
stimulus and bank recapitalization could be in jeopardy."
Malaysia imposed selective capital controls on September 1,
taking a giant step away from the free market polices of then
finance minister Anwar Ibrahim.

Prime Minister Mahathir Mohamad sacked Anwar on Sept. 2,
calling him morally unfit.

Anwar's sacking and subsequent arrest sparked unprecedented
anti-government demonstrations in the capital. The former cabinet
minister has pleaded not guilty to five counts each of corruption
and sodomy.

The IMF said Malaysia's attempts to push down interest rates
would likely have only limited success due to a collapse in
investment spending and of demand for credit. It said
artificially low interest rates would likely hinder corporate
restructuring.

The IMF said Malaysia might have to reconsider the exchange
controls.

"Therefore, Malaysia would need to consider how to modify its
current exchange rate arrangements if external developments
brought internal and external balance objectives into conflict,"
it said.