Financial Times, Wednesday 2 Sep 1998

Malaysia pulls ringgit out of markets

By Sheila McNulty in Kuala Lumpur

Mahathir Mohamad, the Malaysian prime minister, imposed stringent currency controls yesterday to pull the ringgit out of international financial markets.

Dr Mahathir also announced draconian restrictions on currency holdings by Malaysian residents and foreigners in an attempt to regain authority over his deteriorating economy.

Foreign investors reacted swiftly, pushing the benchmark stock index down 13 per cent to 262.70 points - almost 80 per cent lower than its pre-crisis peak.

"People can no longer stay with the free-market system," Dr Mahathir said. "The world is not moving ahead, it is moving backward."

Dr Mahathir has banned the trading in ringgit instruments among offshore banks and stopped Malaysian institutions offering domestic credit facilities to non-resident banks and stockbroking companies.

He announced that the M$100m in cash circulating outside the country must be repatriated within one month or it will have no value.

Residents cannot take more than M$10,000 worth of foreign currency out of the country. They require prior approval to make payments to non-residents to invest abroad more than the equivalent of M$10,000 in foreign currency.

Foreigners who sell shares cannot repatriate earnings for a year, Dr Mahathir said. At the same time, travellers cannot bring in or take out more than M$1,000 cash. Payment for all exports and imports must be made in foreign currency.

The currency controls are so comprehensive - and unorthodox - that a row last week over their implementation prompted the resignation of Ahmad Mohamed Don as central bank governor, and that of his deputy, Fong Weng Phak.

The ringgit strengthened as investors rushed to cover short positions, but then trading halted as offshore dealers attempted to determine how they will settle trades under the new system that brings all trading onshore. Offshore banks simply stopped quoting the ringgit.

Economists suspected a fixed exchange rate would come next and Dr Mahathir alluded to it. But the central bank insisted the value of the ringgit would be determined by market forces.

"This is definitely a step backwards," said Paul J. Alapat, senior economist at Indosuez W.I. Carr Securities. "It is an effort to close the doors and reflate the economy."

Some economists suspected the plan might work in the medium term if those with ringgit abroad bring it back instead of converting it into foreign currency, and no more outflows are permitted. But, either way, reforms of the banking and corporate sectors must take place.

"It's not a long-term sustainable solution," said Neil Saker, head of economic research at SG Securities. "Over time, the growth impetus will start fading away."

© Copyright the Financial Times Limited 1998
"FT" and "Financial Times" are trademarks of The Financial Times Limited.



SEP 5 1998

Bank Negara clarifies currency controls

KUALA LUMPUR -- Bank Negara said yesterday that conversion into foreign currencies of ringgit proceeds from the sale by non-residents of Malaysian securities will only be permitted after one year.

In the first of a series of clarifications on the new currency control measures, the central bank restated an earlier statement by the Kuala Lumpur Stock Exchange that the holding period for proceeds from the sale of shares purchased before Sept 1 will start from that date.

The one-year holding period for shares purchased on or after Sept 1 will start from the date of purchase.

The central bank said the one-year holding period requirement for non-residents also applies to other ringgit assets such as derivatives, fixed deposits, fixed assets, bills of exchange, treasury bills and private debt securities.

"If ringgit assets are held for less than 12 months, proceeds from the sale must be credited to the external account," it said.

Proceeds from the disposal of ringgit assets held for more than 12 months can be converted into foreign currencies.

Short-term fixed deposits with maturity periods of less than a year, if rolled over up to a year, may be converted into foreign currencies, it said.

Multimedia Super Corridor-status companies are exempted from all exchange control rules, it said. AFX-Asia


Copyright © 1998 Singapore Press Holdings Ltd. All rights reserved.


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