Since the outbreak of the Asian financial crisis more than a year ago, the risk of further waves of instability of increasing proportions still very much remain on the horizon. Despite the measures and reforms that have been put in place by all the affected countries, there does not appear to be any sign of stability returning to the financial markets. On the contrary, the crisis has deepened and spread across other continents. In particular, significant risks remain in the region. A dramatic adjustment in any of the financial centres in the region can be expected to result in significant contagion effects, not only in the region but also in other global financial markets. The effects of these developments have been increasingly severe. The adverse developments in the foreign exchange markets, the equity markets and the depressing trends beginning to emerge from the external sector all reinforce each other to cause a severe contraction in real output of the economies in the region.

Given the global nature of the problems confronting the international financial markets, efforts to restore world financial stability require a concerted effort of the international community. Unfortunately, action on the part of the international community to deal effectively with the risks and challenges associated with the new environment of liberalised and globalised financial markets has not been forthcoming. The current escalation in the contagion effects has not provided the sense of urgency to the world financial leaders to act decisively to contain the global financial crisis. While arguments have been put forward for emerging economies to undertake economic and financial reforms, of greater urgency is the need to reform the international financial system to better cope with the changed international financial environment that we operate in. Unless this is recognised by the international community, there will not be a permanent solution to the current crisis.

Efforts to deal with the current situation on the part of one country alone will not be sufficient to achieve this objective on a permanent basis. In the recent period, we have seen efforts by Hong Kong, Taiwan and Russia each coping by different means to stabilise their financial markets. On the domestic front, Malaysia has persevered to undertake adjustment policies and implement financial reforms to reduce the risks and vulnerabilities to external developments. This relates to achieving macroeconomic stability while at the same time increasing the resilience of the financial system. To a significant extent this has been achieved. Despite the magnitude of the adjustments we have experienced in our financial market, a significant segment of our economy continues to function with a relatively high rate of employment. Similarly, in our financial system, while strains are being felt, the intermediation function continues to operate. Malaysia will therefore continue with its efforts to strengthen its fundamentals and build the foundations for future growth. However, given the build up of risks that have now emerged in the regional and global financial markets, the Government of Malaysia has decided effective today, 1 September, 1998, to implement a series of measures to insulate the Malaysian economy from the risks and vulnerabilities of such external developments.

The over-riding objective of the new measures is to regain monetary independence and insulate the Malaysian economy from the prospects of further deterioration in the world economic and financial environment. In the process, the nation would be adequately prepared to minimise the impact of a possible global economic crisis and a breakdown in the international financial system. The experience of other countries have shown that those which instituted measures to insulate themselves from external developments were in a better position to meet the challenges of adverse global developments. The new measures are based on the following considerations:

1. To limit the contagion effects of external developments on the Malaysian economy;
2. To preserve the recent gains made in terms of the policy measures to stabilise the domestic economy; and
3. To ensure stability in domestic prices and the ringgit exchange rate and create an environment that is conducive for a revival in investor and consumer confidence and facilitate economic recovery.

These measures will be removed should normalisation in the global financial environment take place.

To effect a stable exchange rate regime and insulate the domestic economy from adverse global developments, selected new exchange controls are being introduced. These changes, however, will not affect the business operations of traders and investors nor the normal conduct of economic activity and will continue to guarantee the following:

• General convertibility of current account transactions;

• Free flows of direct foreign investment and repatriation of interest, profits and dividends and capital; and

• Result in minimal inconvenience to the general public.

The changes are directed at containing speculation on the ringgit and at minimising the impact of short-term capital inflows on the domestic economy. The measures on regulation of currency being carried by travellers are no different from those being applied by several other countries, including developed countries. The main changes in the exchange control rules are as follows: 

• External Accounts: Approval is required for transfer of funds between External Accounts. Transfers to residents accounts are permitted only until 30 September 1998; thereafter, approval is required. Withdrawal of ringgit from External Accounts require approval, except for the purchase of ringgit assets.

• Authorised Depositary Institutions: All purchases and sales of ringgit financial assets can only be transacted through authorised depositary institutions.

• Trade Settlement: All settlement of exports and imports must be made in foreign currency.

• Currency held by Travellers: With effect from 1 October, 1998, travellers are allowed to import or export ringgit currency of not more than RM 1,000 per person. There are no limits on the import of foreign currencies by resident and non-resident travellers. The export of foreign currencies by resident travellers is permitted, up to a maximum of RM 10,000 equivalent. The export of foreign currencies by non-resident travellers is permitted, up to the amount of foreign exchange brought into Malaysia.

Conclusion

These measures represent a means to an end. Malaysia has previously applied administrative controls to achieve specific objectives. The track record shows that once these objectives were achieved, the administrative controls were withdrawn. This was the case in early 1994, when Malaysia experienced massive and destabilising capital inflows. Malaysia is committed to the market mechanism and the trend towards liberalisation. But the benefits of the market can only be realised in an environment of stable and efficient global financial markets. Hence, once there is a discernable normalisation of the currency and financial markets, Malaysia will return to the previous arrangements of free capital flows. As we are embarking into uncharted territory, the measures announced today will be implemented flexibly to deal promptly with any problem that might emerge. A task force has been set up to attend to these issues. A communication centre has also been established up to deal with public queries (the contact telephone numbers are: 293-2330, 292-8736, 294-3991, 291-5741, 291-4827).

In conclusion, it is important for the people of Malaysia in general and for the financial sector in particular, to fully understand and support these efforts aimed at insulating and reviving our national economy.

Bank Negara Malaysia
1 September 1998

 Details on Changes In ECM Notices

Existing

New

• No restriction on foreign exchange contracts between authorised dealers and non-residents.

ECM 2: Dealings in gold and foreign currency.

• No change, except for External Account holders.

• Transfer between External Account holders freely allowed.
   

• No restrictions on credits and debits to an External Account.

• Transfers between External Accounts would require prior approval for any amount.

• Transfers to resident accounts in Malaysia banks are permitted until 30 September 1998. Thereafter, such transfers require approval.

• Sources of funding the External Account are limited to:

• Proceeds from sale of ringgit instruments, securities registered in Malaysia or other assets in Malaysia.

• Salaries, wages, commissions, interest or dividend.

• Sale of foreign currency.

• Use of funds in the account is limited to:

• Purchase of ringgit assets in Malaysia.

• Generally residents were freely allowed to make payments to non-residents for any purpose, provided, for an amount of RM100,000 and above :-

• a Form P is completed; and
• the resident does not have any domestic borrowing (if the payment is for investments abroad in any form); or
• the payment is made in foreign currency if in relation or consequential to a guarantee (for non-trade purposes).

• Generally residents are freely allowed to make payments to non-residents for any purpose up to RM10,000 in ringgit or its equivalent in foreign currency (reduction in amount), except for all payment for imports of goods and services

• Residents are freely allowed to make payments to non-residents in foreign currency only, for amounts exceeding RM10,000 equivalent. However, investments abroad in any form and payments under a guarantee for non-trade purposes require approval.

• Form P is completed for amounts exceeding RM10,000 equivalent.

• Prescribed manner of payment for exports is in foreign currency or ringgit from an External Account.

• Prescribed manner of payment for exports is in foreign currency only, other than currencies of Israel, Serbia and Montenegro.

• Non-resident correspondent banks and non-resident stockbroking companies were permitted to obtain credit facilities in aggregate up to RM5 million from banking institutions to fund mismatch of receipts and payments through their External Accounts.

• Domestic credit facilities to non-resident correspondent banks and non-resident stockbroking companies are no longer allowed.

• Residents with no domestic borrowing were allowed to make payment to non-residents for purposes of investing abroad

• Corporate residents with domestic borrowing were allowed to invest abroad up to the equivalent of RM10 million per calendar on a corporate group basis

• Residents with no domestic borrowing are allowed to make payment to non-residents for purposes of investing abroad, up to an amount of RM10,000 or its equivalent in foreign currency per transaction

• All residents require prior approval to make payments to non-residents for purposes of investing abroad, for an amount exceeding RM10,000 equivalent in foreign currency

• Residents were allowed to obtain ringgit credit facilities of below RM100,000 in the aggregate from any non-resident individuals

• Residents are not allowed to obtain ringgit credit facilities from any non-resident individuals.

• There was no restriction on the secondary trading of securities registered in Malaysia, between residents and non-residents, and between non-residents and non-residents.

• For transfer of securities registered outside Malaysia from non-resident to a resident, the resident was subject to the rules on investments abroad.

• Ringgit securities are required to be deposited with authorised depositaries.

• Ringgit securities held by non-residents must be transacted through an authorised depositary for good delivery.

• All payments by non-residents for any security registered in Malaysia must be made in foreign currency or in ringgit from an External Account.

• All proceeds in ringgit received by a non-resident from the sale of any resident security must be retained in an External Account (subject to the conditions on such accounts). However, should the ringgit security be held for more than one year, proceeds from the sale of such securities can be :

• Immediately converted to foreign currency; or
• Credited to the External Account.
• All payments to residents for any security registered outside Malaysia from non-residents, must be made in foreign currency.

• A traveller (resident and non-resident) was freely allowed to import or export any amount of ringgit notes or foreign currency notes, which are on his person or in his baggage.

• Export of foreign currencies requires approval

• Authorised dealers were allowed to import any amount of ringgit notes, subject to reporting on a monthly basis to Bank Negara Malaysia

• A resident traveller is permitted to import:

• Ringgit notes up to RM1,000 only; and
• any amount of foreign currencies.

• A resident traveller is permitted to export:

• ringgit notes up to RM1,000 only; and
• any amount of foreign currencies up to the equivalent of RM 10,000.

• A non-resident traveller is permitted to import:

• Ringgit notes up to RM1,000 only; and
• Any amount of foreign currencies.

• A non-resident traveller is permitted to export:

• Ringgit notes up to RM1,000 only; and
• foreign currencies up to the amount of foreign currencies brought into Malaysia

• Prior approval is required for the import and export of ringgit notes and the export of foreign currency notes, other than as permitted above.

• Up to 30 September 1998, permission is given to a traveller (resident and non-resident) to import any amount of ringgit on his person or in his baggage.

• Licensed Offshore Banks were allowed to trade in ringgit investments up to permitted limits.

• Licensed Offshore Banks are no longer allowed to trade in ringgit instrument.