Malaysian controls worry SE Asian markets
Malaysian controls worry SE Asian markets
SINGAPORE (Dow Jones): Malaysian foreign exchange controls announced Tuesday and political uncertainty after the sacking Wednesday of its deputy prime-minister continue to stall trading in some key southeast Asian commodity markets.
Anwar Ibrahim's sacking by Prime Minister Mahathir Mohamad on charges of alleged official, financial and sexual impropriety fueled fears among commodities traders of an end to free market reforms in Malaysia, while they also braced for a possible slowing in Malaysian trade flows and a build up of red tape.
Malaysia's imposition of currency controls also sparked fears that similar action could be taken by Indonesia, arguably the worst-hit economy amid the ongoing crisis in the region.
Developments in Malaysia, however, overshadowed Indonesia's lifting of import restrictions, tariffs and preferential exchange rate subsidies on staple food items.
The impact on Malaysian palm oil, rubber, cocoa and tin markets was immediate, and Thai rice exporters quickly set out to renegotiate contracts with Malaysian buyers which were settled prior to Tuesday's controls and Bank Negara's announcement Wednesday that the currency would be fixed at an exchange rate of 3.80 ringgit to the U.S. dollar.
Palm oil futures prices at the Kuala Lumpur Commodities Exchange plunged Tuesday and Wednesday before recovering on a technical rebound Thursday and Friday. In Europe, the uncertainty surrounding the ringgit and tight palm oil stocks in Malaysia caused vegetable oil traders to adopt a wait-and-watch approach.
On Tuesday, Bank Negara, Malaysia's central bank, outlined capital controls that effectively make Malaysia the only place where ringgit can be traded. The controls limited the transfer of ringgit to overseas accounts with immediate effect. Foreign banks are barred from getting ringgit loans within the country to finance speculative positions.
The currency controls left traders and dealers of Malaysian natural rubber utterly confused and have effectively suspended trade in the commodity since Wednesday. Malaysian physical cocoa prices, which were earlier denominated in ringgit per ton, have been unquoted since Wednesday.
Trading at the Kuala Lumpur Tin Market was also suspended Wednesday in the wake of the imposition of currency control measures. Though trading resumed Thursday, tin prices on the KLTM plunged 9 percent, or 2.00 ringgit a kilogram, to settle at 20.20 ringgit.
Malaysia is the world's biggest producer and exporter of palm oil and is slated to produce 8.7 million tons of crude palm oil and export 7.5 million tons in 1998. It is the world's third largest natural rubber producer, after Thailand and Indonesia, with an output of 971,100 metric tons in 1997.
It produces around 16,000 tons of tin annually and is the second biggest Asian cocoa producer after Indonesia.
Commodity analysts and traders said they believe that Malaysia's currency controls will cause trade to slow. They said that although the country may gain from currency controls in the near term, it would likely need to relax or even scrap them in the longer term.
The Malaysian controls "will definitely affect the flow of trade in Malaysia and create a lot of uncertainty in the (commodities) markets not only (in Malaysia) but in Indonesia too," said Poh Fiew Whye, Banque Paribas' Singapore-based Vice- President for commodities and trade finance in southeast Asia.
"We can expect to see a scramble among Indonesian traders out of fear that Indonesia too may follow suite," he said in a telephone interview.
A Singapore-based trader with a European trade house noted that Malaysia's economy is export driven and a third of its gross domestic product comes from trade.
"The new measures mean that all exports and import will have to be done in hard currency, which means the central bank will face the daunting task of keeping track of every single transaction. They could do it in the short term but not for long...its an act of desperation," he said.