Please let
me add my words of welcome to this international symposium on currency
controls and
Asian monetary cooperation.
2. My
task is to talk about the strong but selective currency controls which
Malaysia
imposed exactly
one year and one day ago.
3. After
such an incredibly momentous 366 days, I can make no better introduction
than to
remind you
that what is now the past was once the future.
4. That
future then was a most uncertain one. For all of Southeast Asia and most
of East
Asia it was
a most threatening, devastating and gloomy future.
5. Many
had been driven to desperation and despair. Confidence was in even shorter
supply than
capital. Many believed that we would all collapse.
6. We
were told each and every day, many times a day -- sometimes by the very
same
people who
had so shortly before told us that we were dragons and tigers -- that we
had
suddenly all
become either lame ducks or dead ducks.
7. I can do no better than to start by turning your minds back to this time just a year ago.
8. After
more than one year of devastation, much of East Asia was in ruins. There
was little
hope for the
future. There was no light at the end of the tunnel. In fact the tunnel
seemed to
be without
end.
9. Every
day brought news worse than the day before. When something bad happened
in
Thailand or
China, our stock markets fell; our currencies shook. When something
unfortunate
occurred in Indonesia or Hong Kong, our stock markets took a beating; our
currencies
were pummeled. When something untoward happened in South Korea or Japan,
our stock
markets quaked; our currencies were hammered. When Malaysia contributed
our
own share
of bad news, the stock markets of our regional neighbours fell; their currencies
shook.
10. The explanations
were simple. Seldom were more than two words necessary: 'regional
contagion',
'herd instinct', 'crony capitalism', 'corporate governance', 'vicious circle',
'financial
panic'.
11. For some
reason which I don't understand Malaysia was least liked by certain quarters.
Besides the
attacks against our economy, it was made obvious to us that the Government
should either
be overthrown or the Prime Minister at least should get lost.
12. But for
Asia, Mr Alan Greenspan the most powerful man in the world issued a 'blunt
warning' that
Asia's economies were continuing to weaken. 'The evidence we have to date',
Mr Greenspan
said on July 22nd 1998, 'still exhibit no evidence of stabilisation'. Indeed,
he
noted, 'The
most recent data still exhibit deterioration'. The man who warned about
'irrational
exuberance' when the Dow Industrial Average was at 6,600 also warned that
a
sharp US stock
market drop was inevitable at some point. Not 'possible'. Not 'likely'.
But
'inevitable'.
13. Back to
Malaysia, one day after we unveiled our National Economic Recovery Plan,
which set
out more than 200 reforms and transformation measures, on the very eve
of the
departure
of the Malaysia road show intended to raise two billion US Dollar in bonds
--
Moody's showed
its immaculate timing and not so immaculate predisposition by
downgrading
Malaysia's sovereign debt rating to just above junk bond status. 14. The
very
next day,
Standard and Poor's did the same.
15. It was
no surprise that the Kuala Lumpur Stock Exchange (KLSE) plummeted to a
nine-year
low. The Ringgit came under heavy pressure. The bond exercise was, of course,
aborted.
16. Let me
paint for you the background of news and events against which the decision
to
impose our
strong if selective currency controls was made. To simplify and shorten
it I will
merely read
to you some of the headlines of the international press, starting from
July 3rd,
1998. For
obvious technical reasons, I cannot quote to you the much more colourful
and
punchy TV
headlines.
17. On August
3rd: The Nikkei Weekly reported that 'Looting, destruction stagger
Indonesia'.
- The Financial Times headlined 'Gloom over the Philippines' short-term prospects'.
-
The International Herald Tribune reported that 'South Korean Exports Fell
by 13.7 per
cent in July
-- Concern Grows That Recession May Deepen'. In the same issue, the IHT
carried a
feature which suggested that China would devalue:-
(i) if the Yen collapsed; (ii) if China's growth rate were to falter and;
(iii) if there was pressure from Chinese exporters.
-
Many news reports and analyses from the world media followed on the collapsing
Yen,
on the faltering
China growth rate and on China's loss of export competitiveness.
18. On August
3rd also, The Asian Wall Street Journal reported: 'Japan's Jobless Rate
Rose To a
Record 4.3 per cent in June'. Business Week's story on Malaysia was headlined:
'Suddenly,
Companies Are Falling Like Coconuts -- A rising tide of bankruptcies threatens
to engulf
the Malaysian economy'. Whether we would die from brain concussion arising
from falling
coconuts or from mere drowning by the 'rising tide of bankruptcies' was
not
made clear.
19. On August
3rd, the IHT also ran a story headlined 'What If the Worst Happens in
Asia? Not
So Bad'. This article reported the finding of 'respected economists' at
Standard
& Poor's
that under a 'worst-case scenario' in which Japan's economy shrinks by
10 per
cent, in which
China's economic growth rate falls from eight per cent to one per cent,
and in
which Indonesia
lapses into default on its foreign debts, the United States would experience
only a 'mild
recession'.
20. Let me
read to you some of the headlines of August 4: Tokyo (stock market/currency)
fall hits
Asia Markets' -- The Financial Times. 'China demands Indonesia act on riot
racism'
-- The Financial
Times. 'Hong Kong Hurtles Towards Recession' -- IHT. 'China to Fight
Deflation
With Spending' -- IHT. 'Yen Falls to 7-Week Low Against Dollar' -- Asian
Wall
Street Journal.
'(Malaysian) Stocks Face Fall if Malaysia Is Axed From (Morgan Stanley)
EAFE Index'.
21. On August
5, The IHT reported: 'Concern Over Yuan Hits Stocks in China' and 'Seoul
Earmarks State-Owned
Firms to Be Sold'.
22. On August
6, The IHT reported that the 'East Asian Trade Slump Adds to Economic
Woes'. The
Asian Wall Street Journal reported 'Thailand Surge in Business Failures'.
The
Financial
Times announced that 'Japanese consumption slumps by 3.1 per cent' and
that
'Shanghai
foreign currency rise highlights fears of (Yuan) devaluation'.
23. Against
this background, on August 6, 1998, after months of detailed discussion
and
more than
two dozen meetings, full and complete consensus was finally reached that
Malaysia had
to abandon 30 years of committed currency orthodoxy. At exactly 10
minutes past
10 on August 6, 70 minutes into the regular daily morning meeting of the
Executive
Committee of the crisis-management National Economic Action Council, the
decision was
finally made to impose strong but selective currency control. 24. The date
of
implementation
was still open but it was decided that the Malaysian currency should no
longer be
available to currency traders to manipulate the exchange rate. The Government
would fix
the rate according to its own wisdom.
25. Since the
share market was also being manipulated through short-selling activities,
it
was decided
that the repatriation of foreign equity investments should not be allowed
until
one year after
the investments are made. However it would not be possible to implement
this decision
if the illegal market in Singapore, the Central Limit Order Book (CLOB),
was
not stopped.
By using nominee companies sales on the CLOB could avoid registration with
the KLSE.
Thus shares could still be borrowed and short-sold. To stop CLOB all shares
are required
to be registered in the name of the actual owners with the KLSE. Ownership
by nominee
companies was not recognised and any change of ownership not registered
on
the KLSE would
be considered illegal.
26. However
direct foreign investments in productive capacities in the country were
exempted from
the ban on repatriation of either capital or profits.
27. After August 6, the unanimous decision could have been changed or amended.
28. But there
was absolutely no reason for doing so. Indeed, everything seemed to justify
the urgent
necessity for insulating the Malaysian Ringgit from currency speculation
and
attack and
of guaranteeing rock-solid currency stability.
29. On August
7: The IHT reported that 'Fears Grow of Beijing Devaluation -- Yuan Falls
to 5-Year
Low in Black-Market Trading'. The Financial Times reported: 'Hong Kong
stock market
at three and the half year low -- speculators worry over authorities'
commitment
to US Dollar peg and China's pledge not to devalue'.
30. In
their week-end issue which came out on August 8: The Asian Wall Street
Journal
reported that
'In Asia, Worst for Economies is Seen Ahead'. On its leader page, the ASWJ
ran a feature
on 'Beijing's Choice: Preserve Stability or the Yuan'. The IHT argued:
'Financial
Crisis Straining Asian Neighbors' Political Ties'. On another page, the
IHT
headline read:
'Vietnam Devalues Dong by 7 Per Cent'; and 'Speculators Intensify Attack
on Asian Money
-- Yuan and Hong Kong Dollar Face Pressure'. The Financial Times
reported:
'Dealers in China Rush to US Dollars'.
31. Thank
goodness for Sundays, when the global news media try to take a break. But
by
Monday, August
10, the horrible news was back. The Financial Times reported: 'Malaysian
race rumours
spark fears'. Those who were not here but who know Malaysia might be
reminded that
this was a story not on Malay-Chinese or on Chinese-Indian or on
Malay-Indian
problems but about a possible outbreak between Malaysians and illegal
Indonesian
workers; hardly 'racial' I would have thought. 32. On August 10,
the cheerful
news from
the Asian Wall Street Journal was that: 'Investors Expect That Asia Stocks
Will
Drop More'.
This despite the fact that in the preceding week stocks plunged a further
12
per cent in
Jakarta; a further 9.9 per cent in Manila, a further 9.6 per cent in Kuala
Lumpur;
and a further
7.2 per cent in Hong Kong. The AWSJ noted that Tokyo fell by only 3.4 per
cent.
33. Let
me give you some other news headlines which appeared on August 10, 11 and
12:
'Obuchi Issues
Call to Action on the Economy -- First Policy Statement Generates Scant
Praise; Financial
Markets Fall'. 'Obuchi Admits to Prolonged Slump'; 'No Confidence in
Japan'; 'Critics
Attack Japan Banking Plan'; 'Korean Earnings Reports Won't Be Pretty';
'Currency
Worries: Attack by Hedge Funds has run into domestic factors in (Hong Kong)';
'Hard time
for HK -- and set to get worse'; 'Yen Hits 8-Year Low as Fears Mount';
'Concern Grows
Over Hong Kong Dollar'; 'China's Central Bank Says It Won't Devalue
Yuan'.
34. I
also most sincerely apologise for not citing the headlines which chronicle
the human
and social
costs of the Asian crisis. To make an economic or financial or monetary
decision
without considering
the grave human and social consequences is more than stupid. It is
criminal.
And I say this no matter how many economics Ph.D's and financial whiz kids
say
that they
cannot be concerned about the non-economic and the non-financial and the
non-monetary
matters.
35. I
certainly am surprised how merely reading, today, the headlines of a year
ago
provides eloquent
testimony to the dire economic and financial and monetary uncertainties
of this time
last year.
36. As
you well know, on August 14, 1998, Hong Kong, the bastion of free market
laissez
faire capitalism,
decided to frustrate the stock market and currency manipulators by buying
heavily on
the Hong Kong Stock Market.
37.
Currency turmoil hit Latin America. Russia defaulted and some famous people
lost
billions.
LTCM, despite having two economics nobel laureates, a while later also
lost a
great deal
of money and had to be bailed out by friends in high places. As you well
know
Asia went
through further hell before it could, finally, embark on the road to recovery.
38.
I have sketched for you the international background against which the
decision was
made: the
sea of turbulence from which it was natural for a small tempest-tossed
boat to
seek refuge
-- by retreating to a quiet bay of tranquility.
39.
Let me now mention to you Malaysia's own background of experience, failure
and
crisis.
40. The fact is that we tried practically everything. And everything we tried had failed.
41. As
you know, at the beginning, along with the rest of the world, we under-estimated
the severity
of the effects following the Baht crisis which started on July 2, 1997.
Everyone,
from the IMF
down, did not foresee the severity of the so-called regional contagion.
42. In
mid-June, 1997, Malaysia had received an A+ report card from Mr Michel
Camdessus
himself. We were, understandably, very confident we were not 'Mexico' or
'Thailand'.
So confident, in fact, that we quickly and without reservation pledged
one billion
US Dollar
in financial assistance to Thailand, doubling Australia's initial 500 million
US
Dollar pledge.
We later pledged another one billion US Dollar to Indonesia.
43. Then,
the stock market began to collapse in earnest, as did the Malaysian Ringgit.
The
real economy
-- those who produced real goods and services rather than financial
instruments
-- followed in train.
44. When
the real economy started to collapse, we made a horrible mistake. We adopted
what has been
called 'the IMF package without the IMF'. It was very macho.
45. I
felt that I should and not comment other people's economic risk management.
Now I
wish I had
not resisted my gut feelings. But then this was the way the great minds
had
devised to
deal with such a crisis.
46.
Once crisis struck, domestic demand and investment had to be buttressed.
So what
did we do?
Under the finest IMF advice, we decided not to buttress but to cut Government
fiscal spending
by 21 per cent. This was the single most devastating mistake. But we were
so very obedient.
47. We
should have decided on a deficit budget, something we could well afford
after
years of budgetary
surpluses. But we again followed the finest IMF advice. We went for
another budget
surplus.
48. We
should have left the banks alone. Instead we told them to stop using the
6-month
non-performing-loan
regime and told them to adopt a 3-month NPL regime. With that we
helped to
strangle businesses earlier.
49. But
that was not quite enough. We told them not to lend money for so-called
non
productive
activities. And the banks stopped lending altogether. It seems nothing
was
productive
any more to them.
50. We
were told that the market would not see the return of confidence until
they saw
blood. They
want to see our businesses crushed and exsanguinated. We obliged but it
was
never enough.
Blood, more blood must be spilt.
51. Bleeding
profusely, we nevertheless wondered why we were getting weaker. And why
was there
still no return of that precious commodity called confidence.
52. Instead
of holding or even reducing interest rates, we decided to raise the cost
of
borrowing
to levels no business could survive. Not surprisingly, many businesses
grounded
to a halt.
53. When
business comes to a halt, an economy drops like a stone. This is what
happened.
The Malaysian economy dropped like a stone.
54. From
the very beginning, I was accused by the foreign Press of 'being in denial'.
I
admit I did
harbour different views as to the causes of the economic turmoil. Not accepting
the accepted
views apparently translates into being 'in denial'. I must not single out
the
foreign press
alone. Some local pundits too echoed the 'being in denial' accusation.
55. What
were the choices before us? If we did not push interest rates further to
the sky,
large amounts
of Malaysian Ringgit would move to Singapore, where depositors could
secure up
to a 35 per cent return. Depositors apparently did not mind their Ringgit
getting
devalued by
speculators as long as they earn high returns on their deposits. And so
the
Ringgit flowed
out and left the local banks without money to lend. The speculators
borrowed,
short-sold and devalued the Ringgit further.
56. But
if we try to compete with Singapore and push interest rate higher, our
businesses
would simply
stop doing business. The real economy goes through the floor.
57. This
was exactly what happened. When we made the decision on currency controls
on
August 6,
we knew that our GDP in the second quarter of 1998 would contract massively,
to a level
not seen since the birth of Malaysia.
58. Our
currency had already fallen from 2.5 Ringgit to the US Dollar to 4.8 Ringgit
to the
US Dollar
at one time. Inflation, unprecedented inflation set in. And even as the
cost of
living shoots
up more people will lose their jobs and incomes. Social turmoil must follow
and obviously
political instability as well. Malaysia imported almost 80 billion US Dollars
worth of goods
and services. At four Ringgit to one US Dolllar the loss of purchasing
power was
48 billion Dollars. 59. The stock market index plunged from more
than 1000 to
262 by end
of August 1998. Market capitalisation of more than 800 billion Ringgit
was
reduced to
under 300 billion. For the banks and the companies this loss was real.
Margin
calls could
not be met and banks stopped lending to strickened companies, aggravating
an
already bad
business situation. The foreign observers almost openly gloated over the
company failures.
It was good. They were bleeding. Soon the Government bereft of
corporate
taxes would bleed as well. And what will it do? Turn to the IMF for help
of
course.
60. But
the IMF had not done anything worthwhile for other beleagured economies
in East
Asia. All
it did was to change creditors. They still owe money and their currencies
could still
devalue, their
stock markets plunge. Additionally they have to surrender the direction
of
their economies
to foreign masters, people who could only see revival of the ability to
pay
foreign debts
as the sole objective of having a Government. The people may starve, they
may riot and
loot and kill. These are irrelevant as long as foreign debts are paid.
The IMF
with its limited
stock of remedies is no alternative.
61. We
wanted to borrow from the market but as I mentioned earlier the great rating
agencies,
in their desire to protect us from being permanent debtors, downrated our
credit
rating so
that borrowing from the market would simply aggravate our problems.
62. In
a free market economy the well-being of the Government and therefore the
nation
depends on
the success or failure of the private sector. If one company fails, or
even a small
group fails,
Governments can find ways and means to compensate. But when all the banks
and all the
companies fail, there is no way the Government can finance itself. It will
fail also.
There would
be social and political instability and probably anarchy. Governments cannot
therefore
allow businesses to fail en masse. Yet that was what was happening consequent
upon the devaluation
of the currency and plummetting share prices. The free market is a
great system.
It can contribute towards economic growth and the betterment of the people.
But it can
be abused and when it is abused, the economy can be totally destroyed and
innocent people
made to suffer.
63. We
in Malaysia subscribe to the free market system but it is not a religion
with us. It is
just an economic
system devised by imperfect man. While we should try to adhere to it
closely, we
see no reason to accept everything done in its name when we no longer reap
any benefit
from it. A system is only as good as the result it delivers. After all
it was the
belief that
the system would deliver the result which led to its formulation. If it
does not
deliver must
we still blindly adhere to the system?
64. When
the free market system was evolving no one designed it for currency traders
to
make massive
windfall profits overnight. It was designed for fair competition between
equals, for
trade in real goods and services, for free flow of investments to where
capital
was needed
and profits from commercial activities can be made. No one declared that
currencies
should be regarded as commodities and traded like sugar or wheat or coffee.
Currency was
just a facilitator of trade, a way of doing away with cumbersome barter
trading or
payment in precious metal.
65. Without
currency trading the free market can still function. Indeed for a long
long time
there was
no currency trading while the world traded and grew economically. Fixed
exchange rates
enabled values to be attached to goods and services. Occasional
disruptions
can occur when Governments change the exchange rate of their currencies
but
the damage
to world trade was nothing compared to the last two years of economic turmoil
worldwide.
We in Malaysia feel that we are not being disloyal to the free market if
we
disallow currency
trading. Our real trade should not be affected nor should foreign
investment
in productive capacities suffer.
66. But
the Malaysian economy also suffered from excessive manipulation of the
stock
market, in
particular short selling. This particular stock market activity is normally
acceptable
but when big players with the capacity to move the stock prices up or down
at
will become
involved, it is no longer speculation. It is nothing more than manipulation.
Just
as insider
trading is not allowed, we don't see any reason why market manipulation
should
be allowed.
67. Government
had stopped short-selling on the KLSE but Singapore had set up an illegal
offshore market
over which the Malaysian Government had no control. If the Malaysian
economy was
to be stabilised then the operation of CLOB had to be stopped.
68. And
so on September 1st 1998 Malaysia stopped the trading in the Ringgit and
the
operations
of CLOB. Ringgits resident outside Malaysia in whatever form would become
invalid unless
repatriated within one month of the date. Capital invested in Malaysia
shares
may not leave
the country for one year, although other capital invested in Malaysia may
move in and
out freely. Profits may be repatriated freely also.
69. From
the foreign currency speculators, foreign equity investors, foreign free
market
economists,
and the English-language world press there were only three types of reaction:
- abuse, undiluted
and constant;
- abuse in
the guise of intellectual discourse; and
- abuse in
the form of unsolicited and free advice.
70. My
friend, the great George Soros, called our September 1st measures 'outrageous'.
Given his
world- view and the need to make money from large currency movements it
was
no doubt 'outrageous'.
71. Business Week labeled Malaysia a 'Renegade Economy'.
72. The
New York Times reported a senior Clinton administration official as saying
that
the turn of
events in Malaysia was 'a tragedy'. Our measures would, he said, be a
'spectacular
failure'.
73. Time
magazine quoted a Bangkok-based expert as saying: 'Mahathir is turning
Malaysia into
a Burma. It will create a black market for the currency, and there will
be a
panic in the
country to buy US Dollars'.
74. The
erudite Business Week said that the measures could 'run down foreign reserves,
making devaluation
likely and prompting trade restrictions'. The great economist Milton
Friedman told
the world that Malaysia's move was 'the worst possible choice'.
75. The
great International Herald Tribune proclaimed that 'Malaysia last week
shut the
door on the
global economy'. Pretty strong stuff.
76. A
London-based analyst said that Malaysia was suffering from an 'IQ crisis'.
This, I am
sure, must
be a reference to the fact that we do not have two economics nobel laureates
advising us.
It can not be a reference to the suggestion, very often made, which I am
sure is
true, that
'What Dr. Mahathir knows about economics can be written on the back of
a
postage stamp'.
77. Abuse
from the foreign currency speculators and manipulators who could no longer
make money
out of the misery of the Ringgit I can understand. Abuse from the foreign
equity investors
who had to wait for one year, I can fully understand. Abuse from the free
market economists
I can also fully comprehend. After all, we were challenging a sacred
commandment.
But the abuse from the English-language world press is a little puzzling.
78. As
you will no doubt have noticed, the first line of argument marshalled against
us was
that we were
absolute idiots. Disaster would immediately strike. Malaysia was 'kaput'.
Finished.
79. Then,
when it was clear that disaster had not struck, that Malaysia was not 'kaput',
not
finished,
we saw the argument that whilst death was not at hand, the Malaysian economy
would be crippled.
The medium-term effects would be enormous.
80. When
it has become clear that Malaysia had succeeded and was well on the road
to
recovery,
the latest line of argument is that Malaysia's accomplishments
are clear but that
the IMF-assisted
economies have done as well as we have without having to resort to
currency controls.
81. The
proponents of this line of argument seem to have had a blind logical spot.
If they
can argue
that the others have achieved comparable results without having to adopt
currency controls,
can it not be argued that we have achieved what others have achieved
without having
had to go through: the misery of massive unemployment; the tragedy of
children thrown
out of schools; the decimation of the middle class which we have spent
a
generation
to build; blood on the streets and political turmoil throughout the land.
82. We
have been able to achieve what others have achieved: without having to
go into
massive debt;
without saddling future generations with massive debt- servicing burdens;
without having
to sell our family silver and our precious heirlooms; without having to
auction
off our precious
corporations to foreigners at fire-sale prices; and without having to bend
and to bow
to anyone; without having to kiss anyone's feet.
83.
Most assuredly, what we think are deeply important to us may not be equally
important
to others. The economies of East Asia are all different. Comparisons are
often
difficult
and unfair. But most surely each country has the right to decide on its
priorities and
to choose
its own path to recovery.
84. And
most obviously, the unorthodox, bold and strong measures which we took
366
days ago has
borne fruit.
85. We
were told that there would be massive capital flight one way or another.
People
would be breaking
doors trying to get their hands on US Dollars. Interest rates would be
forced up
because of a severe shortage in liquidity. There would be a black market
in every
nook and corner.
There would be massive over- bureaucratisation as an army of civil
servants would
be needed to administer the system. Corruption would run rampant as
Malaysians
and Malaysian businesses buy their needed supply of hard currencies, which
would, of
course, be in short supply. Exporters would under- declare their exports.
Importers
would over-declare their imports. Transfer pricing would run riot. The
Ringgit
would not
be able to stabilise. Indeed, it would be forced to devalue. Needless to
say, the
stock market
would go into a further tailspin. Malaysian shares would not be worth one
cent.
86.
To this day, there are the most erudite economists who can find in their
imagination the
currency black
market that none of us have been able to find. The Ringgit has remained
rock solid.
In fact, if there are 'fears', the 'fear' and the widespread expectation
is that the
Ringgit would
strengthen.
87. As
for the stock market, I might just mention that at the end of August 1998,
before
anyone got
the whiff on our currency measures, the Kuala Lumpur Composite Index stood
at 302. By
the first week of July 1999, it had shot past the 870 mark. It has since
corrected.
I have every confidence that it will shortly begin its upward march once
again.
88. One
year ago, the market capitalisation of the shares on the KLSE was under
RM300
billion. It
now stands at more than RM500 billion. More than RM250 billion has been
created. The
'wealth effect' has found its way through the economy.
89. As
for the crucial interest rate, in August 1998 the base lending rate was
11.7 per cent.
Today, it
is below seven per cent.
90. In
August 1998, our exports stood at 5.79 billion US Dollar, minus 17.8 per
cent on
an annualised,
year on year basis. In June this year, it rose to 6.9 billion US Dollar,
plus
17.8 per cent
on an annualised year on year basis. Our export performance has surpassed
that of any
other economy in East Asia.
91. In
August 1998, our external reserves was 20 billion US Dollar. By the end
of July this
year, this
had increased to 32 billion US Dollar, an increase of 60 per cent over
a period of
11 months.
92. In
August last year, we had enough to finance four months of retained imports.
By July,
our external
reserves were sufficient for seven months of retained imports.
93. I
am sorry to disappoint our critics. We were, we are, and we do not expect
to be
short of foreign
exchange. We were, we are and we do not expect to be short on liquidity.
And with the
third highest savings rate in the world -- in excess of 40 per cent of
GDP --
we are in
no way dependent on straight foreign capital, although we of course love
foreign
direct investment.
94. In
August 1998, our inflation rate stood at 5.6 per cent. In June this year,
this had
plummeted
to 2.1 per cent. The Producer Price Index was a plus 14.5 per cent in August.
It had plummeted
to minus 6.7 per cent in June.
95. The
number of new monthly job retrenchments has fallen from 7,125 in August
to
1,580 in July,
four and a half times lower.
96. On
the other hand, the number of job vacancies has jumped from 6,005 in August
to
9,711 in July.
97. As
for the banking sector, please note that the average risk-weighted capital
adequacy
ratio of the
banks in Malaysia stood at 8.2 per cent in August 1998, which is within
the
international
standards set by the Bank of International Settlements. In June of this
year, the
ratio stood
at 12.7 per cent.
98. The non-performing
loans of the banking system on a six months basis stood at 11.4
per cent in
August 1998. Contrary to the expectations of the foreign experts, it did
not
shoot through
the roof. Indeed, NPLs fell to 7.9 per cent in May this year.
99. On
a three-month basis, NPLs stood at 12.8 per cent in September. I am sorry
to
confound those
who think they know better. But NPLs on a three-month basis stood at
only 12.7
per cent in May. Compare this with the 30 per cent or 40 per cent or 50
per cent
seen elsewhere.
100. The Manufacturing
Production Index recorded a minus 14.5 per cent in August last
year. In June
this year, it recorded plus 12.4 per cent. 101. Sales of passenger cars
have
jumped from
13,701 in August 1998 to 20,141 in June 1999. Sales of motorcycles have
jumped from
19,369 to 21,225. Sales of new commercial vehicles have jumped from
1,681 in August
to 2,691 in July.
102. I can
go on and on and on with the statistics. If you do not like or trust statistics,
just
visit the
shops and the restaurants. Only, give yourself a little extra time -- because
I am
afraid the
traffic jams have come back.
103. In the
third quarter of 1998, we suffered massive negative growth. In the fourth
quarter of
1998, we improved but the contraction was still double-digit. By the first
quarter
of this year,
we had achieved a massive turn-around to minus 1.4 per cent growth, a
remarkable
turn-around when it is remembered that if not for a large minus seven per
cent
in January,
when production was hit by the Muslim Eid-il-fitri celebrations and the
Chinese
New Year,
the first quarter would have seen positive growth.
104. I can tell you today that in the second quarter, we achieved 4.1 per cent growth.
105. On the
ground, we know that we have made a massive recovery. Technically,
because a
recession is defined as two consecutive quarters of negative growth, we
can now
say that the
great Malaysian economic recession of 1998 has come to an end.
106. We now receive the nicest praises, sometimes from the most unlikely places.
107. Mr Michael
Dee, Managing Director of Morgan Stanley Dean Witter's Asian debt
capital markets
said: 'The measures taken have reduced its vulnerability to external shocks.
Malaysia should
be proud of its achievements as it did not use IMF's recovery measures
but stayed
from it'.
108. Ann Ginsberg,
Morgan Stanley Vice President and Senior Sovereign Credit Analyst
says that:
'The controls have been used properly. In fact, it has made the country
-- which
has a healthy
balance of payments -- more competitive'.
109. Margaret
Kelly, Senior Advisor in the IMF's Asia- Pacific Department has said that
Malaysia 'has
wisely used the breathing space provided by the controls'. Her number one
boss, Mr Michel
Camdessus, has said: 'I praise the way in which Malaysia has been able
to
adopt a soft
system of controls'.
110. Mr Camdessus's
comment suggests one reason why our strong but selective currency
controls were
successful. It was indeed a soft system. Contrary to what our critics assumed
and stated,
our measures were not 'draconian', not heavy-fisted, in no way punishing
-- or
even inconvenient.
No bureaucracy was needed because the commercial banks did most of
the work in
the normal course of their business.
111. A second
very important reason is the fact that we were successful in our export
drive. The
foreign exchange came in by the bucket. Contrary to the warnings of our
detractors,
there was no shortage of foreign exchange and there was no liquidity problem.
We had to
be firm but we had the wherewithal to operate what Mr Camdessus called
'a
soft system
of controls'. Malaysia was flushed with funds. I would not recommend any
country to
try exchange controls if they are going to fail to generate substantial
trade
surpluses.
112. A third
reason for our success is the fact that we merely and very sincerely tried
to
guarantee
the stability of the Malaysian Ringgit, not its value. We wanted a fixed
rate, not a
high rate
for the Ringgit.
113. Fourth,
we succeeded because we deliberately sought to stabilise the Ringgit at
a
reasonable
level, not at an over-valued level -- for technical stabilisation reasons
and
because we
always had our export and national competitiveness at the forefront of
our
minds. We
certainly did not try to achieve a rate for the Ringgit which the fundamentals
could not
justify. Because the Ringgit was reasonably valued there was never a rush
or a
reason to
convert to a foreign currency unnecessarily.
114. Another
reason for the success of the measures we took was the fact that with this
single bold
step, confidence in the stock market, in the Malaysian Ringgit and in the
real
economy was
quickly restored. Without this rapid, almost over-night restoration of
confidence,
we could not have succeeded. Had we seen riots in the streets, had we
suffered political
instability, confidence could not have returned.
115. Tied to
the confidence and the optimism was the fact that our controls were selective.
They took
the most meticulous care not to in any way hinder trade or the repatriation
of
profits.
116. Foreign
direct investors did not pull out. More foreign direct investment in fact
flowed
in. Not surprising
since exports were booming. Investors laughing all the way to the
bank
do not close
or reduce their operations. Even foreign equity investment recorded a
substantial
net increase as they chased profits on a fast rising stock market.
117. To be
sure, some external factors helped a great deal. The hedge funds have beaten
a
hasty and
forced retreat after the LTCM fiasco. Their backers and bankrollers have
become much
more cautious.
118. The currency
stability in East Asia and the economic recovery of the East Asian
economies
has been a great help.
119. We were
and are fortunate that no-one has followed or said that they intend to
follow
Malaysia's
example. A heretic can be tolerated. But a heresy cannot. We would
have been
punished by
global capitalism and by the powers that be had we spawned an intolerable
heresy.
120. We are
thankful for some external developments. But the fortuitous external factors
detract not
one jot from what we have been able to achieve on our own.
121. I cannot
lavish enough praise on the experts and technicians whose commitment to
Malaysia and
belief in Malaysia never wavered and who made sure that there were no
devils in
the details.
122.
Last but by no means least, I must fully acknowledge the pragmatism, the
unity and
the will of
the Malaysian people -- from the worker to the entrepreneur, from the farmer
to
the civil
servant -- all of whom knew that we were fighting for our life, who found
the will
and the way
to stay united, to work and to fight together on the same team for the
common
objective
of rapid national recovery.
123. They are
Malaysia's greatest secret of success. I salute them.