Putrajaya says will impose capital controls only in crisis
KUALA LUMPUR, Nov 29 — Putrajaya reaffirmed today that it had no plans to impose capital controls to regulate the flooding of “hot money” into Malaysia but pledged it would do so to insulate the economy in the event of another economic catastrophe like the 1997 Asian financial crisis.
Deputy Finance Minister Datuk Donald Lim Siang Chai told the Dewan Rakyat today that the government acknowledged that the country was facing “serious” times, expounded by moves to regulate capital inflow by other emerging markets like Thailand, Korea and Indonesia, but maintained that Malaysia was well in the position to intermediate its flows.
He noted that Malaysia’s foreign reserves remained high at US$105 billion (RM331 billion) while its external debt was low at 30 per cent of the gross national income and pointed out that the country’s present rate of capital inflow remained moderate and “not in the big figures”.
“But most important of all is that we have a real-time monitoring system on our capital inflows and we are able to regulate it.
“However, the government will take stringent action, like what was mentioned earlier in the House (imposing capital controls), but during times of crisis like what we faced in 1998 during the Asian financial crisis,” he said.
Khairy (picture) had pointed to warnings issued by international agencies like the World Bank, the International Monetary Fund and the Asian Development Bank to developing countries that the impending massive flow of hot money or speculative capital into emerging markets would eventually destroy and destabilise the economy.
“China, Thailand, Korea and Indonesia have already imposed several forms of controls on its capital inflow to ensure that this trend would be well in control.
“We heard however that at this point, the Finance Ministry and Bank Negara is still monitoring the situation and have no plans to impose capital controls.
“In view of the vast difference in interest rates between the US and Malaysia as well as the appreciation of the ringgit by 11 per cent, under what circumstance would the government, through Bank Negara, think of implementing capital controls?” he asked.
Speaking to The Malaysian Insider later, Lim noted that there was no reason for Malaysia to retrace the steps of former premier Tun Dr Mahathir Mohamad who enacted capital controls during the 1997 crisis.
“There is no reason for us to go back when it took us so long from 1998 to lessen such controls.... unless there is a big issue like the Asian crisis or a world crisis. At this moment, like I mentioned earlier, capital inflow is moderate... it is not in big figures and we have a large foreign reserve if compared to our inflows.
“We are quite strong,” he said.
Lim added that Malaysia was slowly moving away from its dependency on the US dollar and was currently looking for ways to allow more trading nations to use a “mutual currency”.
“Like since September, we have the ringgit-renminbi peg, allowing companies in both Malaysia and China to trade in either currency.
“So that will save us some money,” he said.
Earlier last week, DAP MP Charles Santiago had called on the government to impose capital controls, warning that the country to regulate the flooding of hot money or it would be head into a tailspin similar to the 1997 crisis.
He had explained that this time the hot money would come from the US Federal Reserve’s move to spend a whopping US$600 million (RM1.8 trillion) to purchase US Treasuries over the next eight months under its quantitative easing programme.
“You will see a surge in the property, currency and stock markets, including even in food and oil. Therefore, Malaysia has to do something in order to control such movements.
“When the money comes in, it may look all nice but when it leaves, it will leave a whole lot of destruction along the way. Thousands will lose their jobs, our SMEs will shut down,” he had warned.
In a recent statement, Bank Negara Governor Tan Sri Zeti Akhtar Aziz had announced that the central bank was not considering implementing capital controls to deal with the inflow of funds due to massive liquidity in western economies that are seeking higher returns in faster growing emerging markets.
She had also noted that the large and volatile capital inflows into regional economies could pose risks to macroeconomic policies and financial stability, claiming that Malaysia was in the position to intermediate the flows.
The country, she added, had also gained experience from the 1997 Asian financial crisis.
Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah had also, in an interview Bloomberg, made a similar statement, pointing out that on the flip side, the country was benefitting from capital inflows.
Santiago had however disagreed with the view, warning that the country was heading into yet another tailspin like it did in 1997 if it failed to regulate capital inflow and protect the local economy.
“There is a similar trend that you can find in Indonesia, which you can find in Singapore and Thailand and South Korea, where the hot money is coming in in a very big way into emerging markets and this will push up inflation and asset bubbles, which is the cause of the major crisis in 1997 and, to some extent, the present crisis,” he had said.
Santiago further pointed to the country’s sluggish 5.3 per cent growth in the economy in the third quarter of this year, pointing out that Malaysia could not afford to see a further appreciation of the ringgit.
In Parliament earlier today, Lim also said that most of the foreign direct investments (FDIs) in Malaysia was to the manufacturing and service sectors and in the latter, it was mainly channelled into the finance, insurance and technology-based sub-sectors.
He also noted that the net flow of portfolio investments had recorded an excess of RM23.4 billion this year compared to a deficit of RM22.5 billion in the same period last year.
Lim added that the inflow of investment into Malaysia in the first quarter of this year had shown an upward trend compared to the corresponding period last year, fuelled by increased investor confidence.
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