(Dewan Rakyat, Tuesday): The Deputy Prime Minister, Datuk Seri Abdullah Ahmad Badawi, when tabling the White Paper and the motion asking for support for it, prided the government’s preparedness to resort to "unconventional" methods to resolve the worst economic crisis in the nation’s history.
I agree that we must be prepared to be pragmatic and even unconvential to tide the country through hide times, but we must always be mindful that there are certain things we cannot be unconventional about, i.e. eternal principles and values, like justice, freedom and truth.
We cannot be so unconventional as to allow an Inspector-General of Police to beat up a former Deputy Prime Minister when arrested until he got the infamous "black eye". We cannot allow any unconventional action which persecutes a Member of Parliament for being the first national leader in 42 years of Malaysian nationhood to fight for the rights of a Malaysian citizen of another race and religion - in this case an underaged 15-year-old girl - and prepared to pay the highest political price - the case of Lim Guan Eng.
We also cannot permit unconventional actions which are no more than double standards like the UMNO constitution being surreptitiously amended and approved by the Registrar of Societies within a month, without the general membership realising that it involved the suspension of UMNO party elections, while the application for the registration of ADIL is still pending after four months!
Almost 21 months ago, this region of the world suffered a major economic setback as the era of fast growth ceased. The Asian Miracle gave way to the Asian Meltdown. The Asian crisis has been attributed to many causes – cronyism, market failure, imprudent borrowing, the creation of bubble economies supported by volatile capital flows, poor economic fundamentals and the ravaging and marauding activities of greedy hedge fund managers, currency speculators and the rating agencies. There is no real agreement as to what were the real causes. But fair and objective analysis indicates that both external and domestic factors contributed to the devastation.
The crisis began to our north in Thailand and spread rapidly through contagion effects to the rest of this region. There is no denying that the crisis was fuelled and worsened by the inapt policies of the International Monetary Fund (IMF) pushed at the behest of the United States and its partners in the Group of Seven industrial countries. Weak and delayed responses by the affected governments aggravated the crisis.
The crisis has taken its toll. A heavy price has been paid. Governments have fallen, blood has been shed, millions have been pushed into poverty, millions have been added to the ranks of the unemployed and once vibrant corporations are now in bankruptcy. This region, once the envy of the world and the darling of Western investors, is still in crisis, a crisis that is both economic and political.
History will make its judgments. But we here have a responsibility to take stock of what we as a nation did in responding to the challenges. We must draw lessons so that we are better placed to cope and restore the conditions for sustainable growth.
Some of our neighbours have bitten the bullet and taken steps to put right the most glaring weaknesses. The world has come to realize that there is a price to pay for the increased shared prosperity brought about by globalization. Slowly but surely change is afoot. We need not agree with all of what is being proposed by the G7. But there are elements in all these proposals that merit consideration. Even the infallible IMF has acknowledged that mistakes were made but we have not seen or heard any acknowledgment from the government benches opposite that they were culpable, let alone accountable for the devastation inflicted on the citizens of this nation.
The Malaysian crisis
What started as an economic crisis, has become an overwhelming national crisis, a crisis affecting all aspects of life - economic, political and social. Not only have institutions been subverted and destroyed, truth has become a casualty. The law-abiding go in fear of the guardians of the law some of whom act as nothing but common thugs, knowing too well that they will be protected and go unpunished. Torture, abuses of the processes of the law have taken over as accepted instruments practised by the state. Malaysians and the world had thought that 1988 during the Tun Salleh Abas crisis was the nadir for the rule of law, but today, in 1999, on the threshold of the third millennium, the rule of law has plumbed even lower depths!
An ostrich-like approach or a denial of reality, as articulated by some in this country, serves us ill. This demonstrates and underscores the arrogance of the all-knowing, always-right leadership that has mismanaged the affairs of the country. It has deceived the people, abused their trust, and usurped power to further the greed of the few while trampling on the rights of the many.
The utter contempt with which the people are treated has reached intolerable levels that the people no longer have faith in the utterances of this regime put out through its propaganda machine. Never have Malaysians in their entire history been as disillusioned as they are presently. Never in our entire existence as an independent nation, have citizens taken to the streets to protest or demand that the Prime Minister and his cronies step down, braving brutal police attacks of tear gas and chemically-treated water cannon. Never has there been such shameless use of power.
We, the elected representatives of the people, have a legitimate right to hold to account those who contributed through their actions to an aggravation of this national crisis. The crisis has caused untoward sufferings to the people of this country, sullied the stature of this proud nation and undermined the rule of law. The wanton actions of the Barisan Nasional Government and its cronies cannot be dismissed lightly, as they constitute a gross abuse of power.The people demand answers and they have a legitimate right to an accounting. Their verdict will indeed be delivered in due course at the ballot box – an event that the ruling elites will not be able to avoid for too long, unless of course they in desperation declare an emergency and suspend general elections.
The Economic Crisis
Most analysts agree that while external factors contributed to the emergence and unfolding of the crisis, there were compelling domestic factors within the control of this Government that made the crisis in Malaysia deeper than it ought to have been. Let us examine the circumstances that led up to this crisis.
Over the past decade this Government indulged in a frenzy of give-aways to its cronies under the guise of "privatization". I first coined the word "piratisation" in Parliament on July 8, 1987 to describe such give-aways when debating the privatisation of the North-South Expressway to United Engineers Malaysia (UEM). Such piratisation of the wealth of this country created the breeding ground for abuses of power and even corruption resulting in the creation of the cronies of the Mahathir administration.
There has been no accounting ever of the manner in which members of the Administration, including their families, have accumulated obscene levels of wealth which was a betrayal of the trust of the people. The wealth of this nation was squandered in any number of ways – the mega projects and the still unaccounted losses of Bank Negara’s reserves through the forays in currency speculation are but a few examples. Mr. Speaker, it did not stop there. Public resources have been doled out to bail out cronies and the saga of the waste and squandering of national wealth continues.
The processes described above did not stop with abuse of public assets. This government indulged in raiding the banking and financial sector by directing financial and banking institutions to lend and lend to the chosen few thereby weakening the financial institutions of the country and putting at risk the deposits of the ordinary man in the street. This is how, Mr. Speaker, the nation’s mountain of Non Performing Loans was created. Irresponsible lending created the bubble economy. The Prime Minister takes great pride that Malaysia has entered the Guinness Book of Records in countless ways. But he has never acknowledged that this country has the largest ratio of loans to GDP. This badge of shame cannot be hidden.
It was not George Soros or the Jews or the evil-minded United States and their cronies that brought about the impoverishment of the nation. It was the Barisan Nasional Government and its robber barons. It is indeed the height of hypocrisy for the Prime Minister to rage against currency speculators while he conveniently forgets that Bank Negara had earned the odious distinction of being the largest currency speculator, losing some RM20 billion of the nation’s reserves. To this date there has been no accounting for these reckless activities.
This Government through its actions and inactions created the economic and financial disaster that the nation has come to face. It permitted the subversion of the key financial institutions of the country – quite apart from the destruction of the judicial system and the agencies for maintaining law and order. The markets did not ignore these facts. The loss of confidence on the part of lenders and investors was sufficient to trigger the herd-like exit from the country of funds that had been invested.
The crisis was further exacerbated by the intemperate remarks of the Prime Minister. What little credibility remained was wiped out by the actions of the Prime Minister in removing the one single credible member of the Government – the then Deputy Prime Minister and Finance Minister, Dato Seri Anwar Ibrahim.
What are the policies that have been pursued of late? What lies behind them? Whither will they lead this nation? These and a host of questions are begging to be answered. Let me begin by briefly reviewing some of the government policies. These policies have had three thrusts – to pump liquidity into the system to prime the pump, to isolate the economy from the discipline of markets, and behind the curtain to handout public resources to the chosen few.
The 1999 Budget was crafted to inject RM16 billion through a deficit. I have little quarrel with the notion of pump priming but I do object to the manner in which public funds are to be squandered. A large part of the increased allocations are to be expended on more grandiose mega projects – the beneficiaries of which will be the cronies who will receive construction and other contracts – not through open and competitive bidding, but through backdoor deals. Wasteful public expenditure, including the building of a new Istana for the Prime Minister and a new private jet, will not solve the economic problems faced by the impoverished people. It was the mega projects that got the economy into trouble in the first place. The budget reversed the earlier decision to defer these projects. Another large part of the allocations will be to bail out cronies who are suddenly insolvent and have bankrupted the financial system. Thus they are rewarded yet again - in two ways: through straight bailouts, however crafted, and the award of more contracts.
The 1999 budget, the first introduced by the Prime Minister, was a landmark one because it laid out the foundation for depriving the poor to pay the rich. In real terms, allocations for social services – health, education and welfare - were scaled back while allocations for the Prime Minister mega projects were unrestrained. To boot, the ordinary working man was asked to shoulder additional burdens. Tolls and other fees were raised. The pattern was clear – it was an anti-people budget. The credibility of this Government has never been as low as it is today as it becomes abundantly clear that creative accounting and juggling of funds have taken over transparent and prudent policies. This government no longer has the interests of the people at heart.
The inadequate allocations for preventive health care programmes, for instance, lie at the root of why the country is afflicted with the worst virus epidemic outbreak in the nation’s history, which has killed 89 people, destroyed the RM2.4 billion pig-rearing and pork industries, damaged related and unrelated industries like animal-feed, transportation and tourism as well as caused grave setback to national economic recovery.
Ministerial incompetence and failure of crisis management has compounded the problem resulting in the worst virus epidemic disaster in the nation’s history, but there is no doubt that if there had been adequate funds for preventive health care, so many innocent lives would have been saved and billions of ringgit of losses whether in the pig-rearing and pork industries or other sectors of the economy averted.
To add insult to injury, the Government now proposes to compensate the losses incurred by breeders through funds raised through a lottery. It is clear that while billions of ringgit are available to save the Halim Saads, not a sen of the taxpayers money is available to assist those whose livelihoods have been destroyed by the Ministerial incompetence and government bungling.
Capital Controls and the Ringget Peg
Seven months ago the Prime Minister, against the advice of the honest technocrats at Bank Negara and the Treasury, and the then Finance Minister, embarked on a policy of imposing capital controls and pegging the external value of the ringgit.
He attempted to rationalize his actions on several counts: that the controls would prevent speculators, bent upon a conspiracy to weaken Malaysia, from attacking the currency; the controls would introduce stability in capital inflows thus permitting the Government to engineer a recovery, restructure and re-capitalize the financial and banking system; and permit importers and exporters to have greater certainty in transacting trade. He further embarked on an expansionary monetary and fiscal policy.
Many were skeptical but he was given the benefit of the doubt. With the benefit of hindsight, it is patently clear that the controls and related pegging of the ringgit were measures taken with far different motives.
Events since September 1,1998 have demonstrated the damage done by these measures. The flow of both short and long term foreign capital has become a trickle. The stock market, despite the propping by governmental entities through targeted interventions, has failed to rebound. Even the so-called relaxations introduced in February have largely failed to lift the market. The introduction of exit taxes has been greeted with a yawn by fund managers; the Rating Agencies have given their verdict – why would foreign investors wish to enter this market, when they can invest in other neighboring countries without the need to pay similar taxes on their investments.
Currency controls were perhaps not wrong per se but it is the dismal failure to follow through with policies that would have permitted the restoration to health of the economy. The failure has been amply demonstrated by the need to modify the original set of controls, to give exemptions, and to trot out lame excuses.
The currency peg again represents a set of smoke and mirrors effort.
Fixing the parity at RM3.80 to the US dollar was supposedly designed
to make Malaysian exports competitive. This measure has failed if export
performance in US dollars is used to calculate performance. In any case
the Ringgit would have by its own accord moved to that level without the
arbitrary setting. We need to evaluate that against the performance of
the currencies of our neighbors.
.
Time for a reality check is fast approaching. Come September 1999,
there will be an exodus of funds, as the so-called trapped funds in the
many billions seek a speedy run for the exits. Furthermore, despite the
bailouts, an iceberg lurks in the financial markets. The level
of borrowers who haven’t fully serviced their loans continues to rise.
What Bank Negara did (which even Salomon Smith Barney, the government’s own adviser, privately opposed) was switch to a more lax standard for judging non-performing loans (NPLs). Instead of counting as bad those loans where interest hasn’t been paid for three months, the international yardstick, the default period was extended to six months. So, some of the bad loans were made "good" – even though they still haven’t been serviced. Of course, this lower NPL level is only temporary unless the economy recovers and borrowers’ repayment ability genuinely improves.
The international yardstick for NPLs accepted by almost all countries is three months. This is recommended by the Basel Committee of the Bank for International Settlements and accepted as best international standards by most countries . I understand that no reputable country uses six months as a criteria for NPLs. This was a sleight of hand to make the NPL problem look smaller than it actually was. The S&P and other rating agencies were not fooled. The new base of six months, when it was announced triggered the ratings being pushed down for many of the Malaysian Banks.
It is also becoming increasingly clear that the government has found it extremely difficult to borrow in the international capital markets - with private foreign investors loath to return; international financial institutions, such as the World Bank, weary of lending, particularly to finance bailouts.
It is no secret that the World Bank has deliberately dragged its feet in lending to Malaysia, as against its operations in Korea, Thailand and Indonesia, where speedy disbursements were the order of the day. The Finance Minister should inform Parliament and the nation why the World Bank has been reluctant to lend.
Last week, the World Bank announced US$404 million loans to fund basic health care and poverty relief programs (US$60 million), education (US$244 million) and efforts to counter the year 2000 computer bug (US$100 million).
As far back as April last year, the Malaysian Government had been trying to borrow between US$2 billion to US$ 3billion from the World Bank over a three-year period, which had received sympathetic response.
There was to be a sizeable amount, about US$1 billion, as a policy loan which would not be linked to projects. Only US$ 300 million of this policy loan had been given out to Malaysia last June, providing money for banking and social sector reforms. However the balance of US$700 million was withheld by the World Bank, probably because of the subsequent imposition of capital controls and the sacking of Anwar Ibrahim as Finance Minister.
I understand that the second Finance Minister, Datuk Mustapha Mohamad had tried hard in Oct 1998 when he visited the World Bank to get the US$700 million loan disbursed, but he was told by the World Bank that it would focus on lending for social sector projects in order to cushion the effects of the economic crisis on the poor and vulnerable sections of the population.
There was a long series of consultations, project reviews and appraisals. The notion was to package the US$700 million loan into three or four projects for education, social services, capacity-building (Y2K issues), etc. The series of World Bank missions in Kuala Lumpur between September and December last year found the projects put forward by the Malaysian authorites were badly formulated (e.g. the proposed TanjongMalim University!), requiring financing ongoing projects ( where the contracts had already been given - quite contrary to the Bank’s rules about international competive bidding) and an unwillingness on the part of Economic Planning Unit (EPU)/Treasury to modify policies e.g increase domestic allocations as counterpart-funding for the aged, school feeding, etc.
The bottom line was that the final deal was three loan packages for education, Y2K, and health/poverty-relief programmes (only US$60 million for the last item although the World Bank was willing to loan US$200 million).Thus the three loans total US$404 million, which is way down from the starting-point of US700 million.
The moral of this tale is that the World Bank was willing to give US700 million in loans for social sectors -- but because of incompetence and arrogance in Kuala Lumpur, and the preference for "no strings" loans, the final package was US$ 404 million.
In this connection, I call on the Finance Minister to explain whether it is true that the World Bank Board of Directors had closed its doors for further loans to Malaysia as it had decided last week that there would not be any further lending to Malaysia until there are some policy changes, including the lifting or further relaxation of capital controls. Only if this were to happen, would the World Bank go back to the earlier envelop of over US$2 billion in lending to Malaysia over three years.
I am posing this question because Ngozi Okonjo-Iweala, the World Bank's country director for Southeast Asia and Mongolia, when announcing the US$404 million loans to Malaysia, had said that World Bank board members had asked for a clarification of Malaysia’s capital controls before they approved the latest loans, and that similar loans were not likely to be approved until Malaysia met a string of macroeconomic conditions, including giving a clear exit strategy for its capital controls and drawing up plans to accelerate financial and corporate reforms.
White Paper on "Status of the Malaysian Economy"
The White Paper on "Status of the Malaysian Economy" which is the subject of the present parliamentary debate has one message, that the policies and measures introduced by the Government in the National Economic Recovery Plan (NERP) parepared by the National Economic Action Council (NEAC) "are showing positive results and initial signs of recovery are beginning to emerge".
Or as the Bank Negara Malaysia Governor, Tan Sri Ali Abul Hassan Sulaiman said in the press conference on March 31, 1999 to present the Bank Negara 1998 annual report: "The worst is over and the economy is back on a positive note. The recession economy has bottomed out as seen in the third quarter of last year".
At the Malaysian Institute of Economic Research (MIER) National Outlook Conference on 1-2 December 1998, Ali had already claimed that the economy had bottomed out since last September when capital controls were introduced by the government on Sept. 1 to time with the sacking of Anwar Ibrahim as Deputy Prime Minister and Finance Minister.
The GDP for last year registererd a negative growth of -6.7 per cent
and is expected to register positive growth of one per cent. The
GDP contraction for last year were:
But was the bottoming out of the economic crisis caused by the capital controls introduced last September?
The Prime Minister, Datuk Seri Dr. Mahathir Mohamad was not only positive on this point, he even said in an interview that Malaysia would have gone bankrupt if it were to wait for the International Monetary Fund (IMF) to curb currency trading that had devastated key Asian economies.
He said Malaysia's appeals to international institutions to curb
currency trading fell on deaf ears and the country had to take matters
into its own hands by imposing limited capital and currency controls
to prevent the economy from
going into a tailspin.
Mahathir’s statement in an interview with a weekly news magazine called Executive Intelligence Review (EIR) (Feb. 19, 1999), had raised eyebrows all round, not only in what he said but in the choice of the publication he said it.
During the Parliamentary debate on the 1998 Budget on October 20, 1997, I had asked whether it was true that Mahathir had been influenced by EIR, which is put out by a conservative think-tank headed by Lyndon LaRouche as it had been noted that some of the Prime Minister’s comments were almost verbatim from the think-tank’s newsletter.
I had informed Parliament that Lyndon LaRouche Jr had been described as an eccentric (then) 75-year-old American who spin elaborate conspiracy theories, had run unsuccessfuly for president five times and was convicted in 1989 of conspiracy charges in the U.S.
I had said then that I was neither detractor nor defender for Lyndon LaRouche.
It would appear that LaRouche’s influence on Mahathir has grown in the past 17 months and the Malaysian Prime Minister is probably the only Prime Minister in the world to give interview to EIR. Mahathir is given special prominence on the EIR website.
Equally disconcerting is Mahathir’s claim that Malaysia would have gone bankrupt if not for the capital control measures introduced on Sept. 1 last year.
If this is true, then Singapore, our nearest neighbour, which did not introduce capital control measures should be facing a grave financial crisis if not already on the verge of bankruptcy!
But is Malaysia the only country in Asia where the worst of the economic crisis has over?
I have been struck by two recent news reports. Firstly, Singapore's Deputy Prime Minister Lee Hsien Loong said in Thailand last Thursday that the worst of the economic crisis is over for Asia, with Thailand and South Korea leading the recovery and Malaysia a step behind, but Indonesia still faces daunting difficulties.
Another article in yesterday’s Singapore Business Times, under the heading: "KL curbs not vindicated yet - Capital controls were probably irrelevant to the economy's stabilisation" warned that despite the recent "upbeat sentiment", "the negatives that still hover over the economy are being ignored".
The writer questioned the claims of the proponents of the capital controls introduced last September, who suggested that had they not been in place, Malaysia would have found it impossible to push through its reforms or to stimulate its economy.
The writer said: "There is good reason to doubt this view. Consider the cases of Korea and Thailand. Each of them started out in the crisis from a position that was far worse than Malaysia's. Neither of them imposed capital controls -- in fact, Korea liberalised policies on inflows. Both countries have succeeded in pushing through difficult reforms, ranging from bank closures to corporate mergers to passing legislation on disclosure and bankruptcy.
"Both have also stimulated their economies, and have won the confidence of foreign investors: the Korean economy is seen by many to be in full recovery mode, and Thailand is viewed as having prepared the ground for a recovery, although serious problems remain. Nor have the two countries lately experienced wild swings in exchange rates of the sort that Malaysia cited as a reason to impose capital controls."
Pointing out that the stock markets of both South Korea and Thailand had done well since their lows of September last, the writer concluded:
"What all this seems to suggest is that Malaysia imposed its capital controls around the time that investor panic about Asian economies was subsiding, and that it would have been able to push through its banking and other reforms while continuing its liberal payments regime -- just as Thailand and Korea were able to do. In other words, the capital controls were irrelevant to the stabilisation of the Malaysian economy. Nor have these controls succeeded in stimulating bank lending, consumer expenditure or corporate investment -- which suggests that the real problem lies, not with currency speculation and the spectre of capital outflows, but elsewhere.
"The controls might even have done harm: foreign direct investment (FDI) inflows declined by 40 per cent last year. Moreover, of the FDI that came in, only about one-third was fresh equity. The bulk comprised loans from associated companies and the reinvestment of retained earnings. Certainly there were many reasons for relatively low amount and weak composition of FDI, including global excess capacity, domestic problems in investor countries -- especially Japan -- and regional uncertainties. But the controls could hardly have helped.
"It may therefore be off the mark to suggest that the Malaysian economy is turning around thanks to capital controls. And it is unfortunate to hear Malaysian policymakers say -- as Bank Negara's deputy governor Zeti Akhtar Aziz did at a recent conference in Hongkong -- that they would like to see changes in the global financial system before moving to dismantle Malaysia's capital controls. They could end up waiting a long time."
Although most economists and analysts agree that the worst of the economic crisis is past, there is considerable disagreement whether Malaysia has started on the path of steady economic recovery. Many expect Malaysia to see flat economic growth this year given sluggish output in key industries amid persistent weak export and domestic demand.
If there is any economic pick-up in domestic activity, it will probably occur in the second half of the year, and this also depends on strong growth in the United States and Japan's recovery which are crucial in ensuring Malaysia's economic revival.
One economist last week predicted Malaysia's 1999 economic growth at 0.5 percent as based on the supply side of the economy, he was not convinced that the Malaysian economy could rebound sharply. This is in contrast to the government's forecast of one per cent GDP growth for this year, and its message that it could reach 2 per cent.
It was also last week that renowned economist, head of Harvard University's Institute of International Development and Nobel-Prize Economics Laureate, Jeffrey Sachs, a leading critic of IMF and regarded as a soulmate of Mahathir's economic policies, said Malaysia's international reputation had been seriously damaged by its authoritarian political crackdown and by the installation of "useless" capital controls.
Sachs told the investors' conference in Hong Kong I referred to a short while ago that he was no fan of Malaysia's policy, saying that "Capital controls on outflows proved useless" as "What is needed was capital controls on inflows" before the short-term inflows could destabilise the economy.
Sachs said that Malaysia, "greedy for such funds to pay for massive prestige projects, put no real restrictions on inflows".
He said the damage to Malaysia's reputation may have long-term repercussions for the country's goals. He did not think Malaysia had done a great job in the last six months "convincing the world to make KL a financial center in the region".
He further said that "a lack of political freedom will hold Malaysia back from attracting IT industry" as the "link between democracy and information-rich societies is important".
With such a scenario, the government must answer the following questions:
How can it be said the currency control is a success if fundamental and large investors are still deserting Malaysia even as late as March, as evidenced by last week’s announcement by fund managers at Scudder Kemper Investments in New York that they had pulled money out of or refrained from investing in the Czech Republic, Malaysia, Russia and some blue-chip Latin American companies because of a lack of "market transparency", with their spokesman saying: "In Asia, Korea is leading the charge on transparency, while Malaysia stands out as the laggard. Unlike its neighbours, Malaysia has changed very little in the aftermath of the emerging market crisis".
What is the government doing to address foreign and local investors’ concern about reform and disclosure?
How can the government claim credit for lower interest rates and claim success for currency control, when Thailand, South Korea and Singapore currencies also stabilise and when they do not have currency controls? Why are their interest rates also falling?
How does the government respond to the need to control the inflow of hot money, rather than the outflow?
How could the government justify currency controls’ tremendous costs to Malaysia’s free trade reputation, prospect to become financial centre, publishing centre, regional centre business and attractiveness as an investment target?
Has the government given up developing the economy in these service-related value-added areas? If the global economies do not come up with a way to regulate the likes of Soros, does that mean Malaysia has forever given up the hope of becoming information, R&D, design, publishing, financial hub of South-east Asia?
Why is the government holding back on decisive banking reforms? First on disclosure. What are the NPLs on three-month and six-month definitions? Are these on three-month or six-month overdue of interest or principal repayments? Why not disclose the figures for confidence and better business decision-making? Who is the government trying to protect?
Why not report the breakdown by banks, sectors and the largest borrowing groups? Only these measures can fully instil domestic and foreign confidence.
We can support the government for trying to give banks breathing space in accounting, but there is also a need for better information to make better banking and investment decision, and to build confidence.
Moody's Investor Service had estimated that by the time Malaysia's NPLs peak, they'll amount to 30% of total loans, or RM125 billion, twice the latest official figure. If Moody's estimate is correct, it would shatter the government's stated budget of RM31 billion to cover Danamodal's NPL purchases and Danamodal's recapitalization exercises.
If Moody's has exaggerated about the RM125 billion NPL, why hasn’t the government debunk it with an updated figure based on the same criteria? If Moody's is right, what is the government doing to deal with the problem?
The government should confirm or deny that just 15 corporate groups account for 20% of Malaysia's entire bank loans; and that most of these large borrowers are friends and family of the Prime Minister and the Finance Minister; and that no one is moving quickly to foreclose on their bad debts.
Furthermore, that three persons have a combined questionable loan total that amounts to a staggering RM53 billion.
There is great concern that the rescue of large conglomerates close to the government is crowding out loans available to small industries and worthier borrowers. Can the government give a guarantee that this will not happen?
The UMNO-backed Renong's debt workout is one such example and the issues raised on Internet websites on such bailouts demand answer and explanation from the Finance Minister.
This is how such a bailout has been described on the Internet website:
"Unveiled last week, the scheme pivots on massive borrowings from the local financial system – banks, insurance companies, unit trust and pension funds – to pay off foreign creditors. In today's banking parlance, that's called ‘evergreening.’ Borrow from Peter to pay Paul, without really enhancing the debtor's ability to pay either one back. The impact of directing RM8.4 billion to one tycoon is to crowd out thousands of worthier borrowers. An obviously more equitable solution would be to have Renong divest its core assets back to the Malaysian government, from whence most of them came, at fair market prices and then for the group to pay off its debts with the proceeds."
Concerns have been expressed that in taking over bad loans, Danaharta is largely paying with "dodgy millennium bonds". Fifty-seven financial institutions in the copuntry have been forced to subscribe to these bonds, using cash released from cuts in liquid reserves maintained at the central bank.
In five to 10 years time, Danaharta must redeem these bonds
with proceeds raised from selling the underlying assets that secured
the original loans. What if Danaharta is saddled with a divestment
shortfall, so those acquired assets can't be salvaged for anything near
the value of the underwritten bonds?
With the government guarantees for such bonds, the
future Malaysian taxpayers will have to cough up, as is happening
today in Mexico. Back during the 1994-95 Tequila Crisis, Mexico's bailout
fund overpaid for bad loans. The process was further hampered by
weak regulators, an inept judicial system and corrupt politicians.
In the end, barely 30 cents for each dollar of acquired assets was
collected. Five years down the road, will Malaysia see a replay
of the Mexican experience in our own country?
In a status report released last month, Danaharta disclosed the total NPLs acquired, a bank-by-bank breakdown, the number of bad-loan accounts and the overall "haircut" imposed on the banking system. The data are not adequate or transparent enough for assessing the effectiveness of the bank-rescue scheme. The bottom line: Is the underlying collateral collectible? And are the loans worth what the government paid?
Danaharta is quick to point to the RM8.1 billion of NPLs bought last year for RM3.2 billion, a 61% "haircut" - the discount to a loan's face value.
As has been rightly pointed, if the agency were to update the figures to include this year's first quarter and the NPLs assumed by Bank Negara, the banking system's "haircut" has been turned into a "hair transplant".
For instance, consider the RM11.6 billion acquisition of Sime Bank's NPLs and the RM7.5 billion takeover of Bank Bumiputra’s NPLs. They were acquired at full face value. Together they amount to over half of all NPLs bought by the government.
What are the collaterals of Bank Bumiputra and Sime Bank? I understand they are half-built shop-offices; RM2 shell companies, which siphoned off billions of ringgit in unsecured loans; and near-worthless stocks like those of Repco Holdings, which once traded at a lofty RM150 and is now mired at RM7.
Overpaying is bad. But possibly worse is Danaharta and Bank Negara buying selected bad loans to stop banks from legally moving against debtors with the right political patrons.
The Renong bailout is a classic example of the reckless policies being pursued. These will in the long term bring nothing but ruin and pain to the population at large.
The details given thus far indicate that the Renong bailout is
a "private" deal. Many analysts have questioned this. The information made
available to date leaves unanswered the question of how Renong and PLUS
will eventually repay the zero coupon bonds together with accumulated interest.
There is no basis to assume that even a strong economic recovery
will lead to the kinds of projected earnings for this sick, bloated and
ill-managed entity. PLUS itself is a heavily indebted entity and it is
legitimate to ask why it is being allowed to assume an even larger
debt burden. Where a true market test be applied, its bonds would be graded
at junk grades.
It's no longer a surprise why hurrying along the whole banking system's
restructuring has become necessary. Malaysian banks are being bailed out
not so much as to restore their health but to funnel more money to bail
out to the cronies. This whole ugly cycle stands a high chance of being
repeated in seven years’ time.
If the proper course of bankruptcy were allowed to run, Renong (which is already in default on a number of loans) would already be in receivership by now. Liquidators would be conducting asset sales (perhaps back to the Malaysian government at attractive prices); and Halim Saad would be jobless - if not exactly poor.
If the asset sales fell short of covering total liabilities, Renong's creditors should take their losses for imprudent lending. And Halim Saad held accountable for poor corporate management. That would be the free marketplace at work. We see no evidence to-date of corporate executives paying a price or being removed for gross mismanagement.
Many good Malaysian companies faced difficulties, but Renong was neither remotely efficient nor responsibly managed. It never had been, despite (or, more likely, because of) all its privileges. Renong’s management crossed the line from incompetent and plain greedy to reckless and irresponsible.
Considering this scandalous state of affairs, a strong case can be made that Renong’s management should be removed and its controlling shareholders should take responsibility for the disaster.
Here I quote Anwar Ibrahim: "For every bad borrower, there is a bad lender". The Renong example amply justifies this statement. Renong was a bad borrower, and the banks were bad lenders as they assumed that ultimately the government would bail them out. The arrangements now being proposed perpetuate this notion.
The proposals announced on 8 March 1999 seek to hoodwink the public into believing that no public funds are involved in saving Halim Saad. This is far from the truth. The cost of RM12 billion to bail out Halim Saad and Renong if the current proposal is approved, will be paid out of public funds and lost tax revenue. In other words, the collective wealth of the people of Malaysia is being invested in maintaining Renong intact, warts and all. But, as the whole twisted saga of Renong demonstrates, that’s just par for the course for the political/business empire of this regime.
PLUS is being given a free ride by being allowed to defer repaying the outstanding loans to the Government, given an extension of its concession, and the right to raise tolls. PLUS will issue RM8.4 billion of zero coupon bonds that yield 10% and mature in seven years. But who will buy these junk bonds? The hard-pressed banking and financial system and indeed the EPF - yet again it is the hard-earned savings of the ordinary man in the street that are being put at risk.
PLUS would then on-lend the proceeds - RM5.4 billion to Renong and RM3 billion to UEM - to pay off their existing creditors. Secured creditors, owed RM5.2 billion, get fully repaid in cash, while RM3.2 billion of unsecured creditors get paid half in cash and half in PLUS bonds. Come June 2006, PLUS must find RM16.6 billion in cash to redeem these bonds. Where will that sum come from ? Or will taxpayers, present and future, yet again be asked to foot the bill?
On the heels of the Renong deal, the nation is told of yet another scam designed for the further protection of Halim Saad. I refer to the grand design to use Danaharta to assume the non-performing loans of four major banks that are outstanding from HOTTICK, the private investment arm of Halim Saad. Mr. Speaker, the people demand answers. Why are Halim Saad’s interests considered above those of the nation? Or is Halim Saad merely the agent acting upfront for UMNO or UMNO leaders?
Is the government doing enough to change the banks' management and shareholders, especially
With the unaccounted and scandalous colossal bail-outs such as Bank Bumiputra and Sime Bank, how can Malaysians be convinced that the government is doing enough to effect banking reforms, including changing the management and shareholders of defaulting banks?
Will Malaysia suffer Japan's fate from 1990. Since the asset bubble bursted in early 1990, the Japanese government has hidden its head in the sand, leaving the country to drift for nearly a decade. Living standards deteriorated for almost 10 years.
Japan also has low inflation, low interest, high savings, high export economy. That did not help their stock market, property prices, living standards compared to their earlier achievement and potential. Has our Look East Policy finally come to its logical conclusion of emulating Japan at its worst?
The Japanese economic and political reform had never taken root, and corruption charges are brought to the surface from time to time. The governmenmt is still trying to use fiscal stimulus and low interest to boost economy, with little result in strengthening the banking industry. Banks are still saddled with bad debts and over-priced assets.
While the Japanese has a larger economy and foreign exchange reserve to survive for a decade of policy mistakes, can Malaysia bear the same mistake for a decade? With the government hiding behind NPL accounting tricks, can the Malaysian government say it is not pushing the problems into the future like Japan?
The Preamble to the White Paper said that "The restoration of public
and investor confidence is crucial to ensure economic recovery" and this
is the greatest failure of the government to date with regard to its economic
recovery programme - as Malaysia is regarded as a "wild card" among the
stable economies in the region.
The National Economic Recovery Plan (NERP) must be regarded as
a failure in being unable to fully restore public and investor confidence
after eight months of implementation, especially as it had realised that
"the restoration of confidence would be an important step" to tackle the
economic crisis.
The White Paper said that the NERP, which was launched in July 1998, provided a comprehensive framework for economic recovery, including steps to counter the negative effects of the ringgit depreciation and stock market collapse. The NERP has six objectives, 40 lines of action, and over 580 detailed recommendations which are "at different stages of implementation by the relevant agencies".
From the White Paper, it is clear that the government and even the NEAC had abandoned some of the important recommendations of the NERP.
This could be seen from the White Paper summary of the six objectives of the NERP in Appendix I.
For instance, of the first objective to "Stabilize the Ringgit", the recommendation in the NERP to "continue with the roadshow to encourage investors from countries, such as Japan, Taiwan, Europe and the United States to inverst in Malaysia" has been omitted in the White Paper’s Appendix I, which is a reflection of the government’s realisation that the international climate for the promotion of such investment road shows is quite chilly and discouraging.
The recommendation for "a study on the feasibility and prerequisites of adopting an ASEAN currency at a future date" has also been quietly shelved, just like the recommendation to "urge Malaysian individuals and large corporations to sell off part of their assets overseas and bring back the funds to strengthen the ringgit".
The second NERP objective of "Restoring market confidence"
has suffererd even more drastic revision, with many recommendations quietly
dropped, such as under the "action" to improve transparency and the regulatory
environment, the recommendations for
Three proposals to show that the government is serious with the NERP recommendation on waging an anti-corruption campaign
There is not a word on corruption, either in the White Paper or in the Royal Address delivered to the joint Houses of Parliament yesterday.
In fact, it would appear that the government’s campaign against corruption died with the sacking of Anwar Ibrahim as Deputy Prime Minister and Finance Minister.
At the opening of my speech, I had congratulated Datuk Seri Abdullah Ahmad Badawi on his appointment as the Deputy Prime Minister, as he is making his first appearance in Parliament in this capacity.
When Abdullah was appointed DPM, he was welcomed as "Mr. Clean". This is a accolade for Abdullah, although it is a backbanded rebuke to many of his Ministerial colleagues, and raises the important question that it is not enough just to have a "Mr. Clean" as Deputy Prime Minister, as what we need is a "Clean Cabinet".
The former Deputy Prime Minister, Datuk Seri Anwar Ibrahim, spearheaded the campaign against corruption in the previous Cabinet, presiding over the drafting of a new and tougher anti-corruption law when he was Acting Prime Minister and which was passed by Parliament in July 1997.
However, when Anwar Ibrahim was sacked from the Cabinet, the whole anti-corruption campaign fizzled out.
I wish to make three proposals to show that the government is serious
about the NERP proposal to continue the campaign against corruption:
Anwar had repeatedly called for the establishment of such an independent commission of inquiry and I am sure Daim is equally prepared confident that he has done nothing as Finance Minister which could not bear public scrutiny. I hope that the establishment of such an independent inquiry would be the first step in the resumption of the anti-corruption campaign under the leadership of Mr. Clean.
The Appropriate Policy Mix
Finally, I wish to end by making five proposals designed to restore public confidence without which there could be no successful economic recovery efforts:
Stop the bailouts – The time has come to cease handing out public and national resources to the kin, friends and cronies of those in power. Let those who have abused corporate power be held accountable. Let them be subjected to the laws of the land – the Anti-Corruption laws if they have abused their position. Let those who have abused their positions be held accountable. Let there be new legislation that permits insolvent corporations to restructure under the provision of laws patterned on the US Chapter Eleven laws, that permit such corporations to operate under protection. Will restructuring their debt.
An Independent Central Bank – We have seen the manner in which the Central Bank has been made an instrument of the regime. It is time to make it an independent entity that develops and implements policies in a professional manner without political interference for the greater good of the nation. Removing the millstone of capital controls must be an object of economic policy.
Safeguard the Workers Savings – The blatant and abusive use of the life savings of the workers, managed by the EPF, must be stopped through the enactment of laws that guarantee the EPF its independence in investment decisions. An independent board that is answerable to Parliament rather than the executive arm of the Government should manage the EPF.
Establish Safety Net Program – Retrenched workers should be protected. A safety net program funded by employers and the government should be established to provide a cushion to those who lose jobs as a consequence of market failure during a recessionary period. A national health scheme, based on contributions in equal parts from employers, employees and the government should be established to protect those that are affected by the slow down. The old and the aged need to be protected through targeted programs of assistance. Other vulnerable groups in the population need similar protection. It is compelling that public resources are deployed to assist the must vulnerable rather than just the rich and the well connected.
Respect for the Constitution- Over the years, this Government has eroded the constitutional rights of the people. It is time that this abuse be reversed. It is time to restore the rights of the citizen by rolling back draconian laws- the ISA, the OSA and the Printing Presses Ordinance- that have concentrated power in the hands of the Executive branch of government and permitted it to assume dictatorial powers. It is time to restore the system of checks and balances that our constitution enshrined in the early days of our existence as an independent nation. First and foremost, it is imperative that the independence of the judiciary be restored forthwith. The forces of law enforcement must be cleansed of the thuggery that has corrupted the Police.
The five-point program that I have outlined above represents a minimal program to get this nation out of the political, economic and moral crisis that the nation faces. I urge the Government to act and act fast. If this call is unheeded, I shudder to think of the even bigger crisis of confidence that will result.
The White Paper concedes that "the restoration of public and investor confidence domestically and in the region as a whole will be the key factor which will determine the speed of recovery".
If there is to be a full restoration of public confidence, I urge the government to:
1. Immediately make public as well as table in Parliament the Royal
Commission of Inquiry report into the "black eye" of Anwar Ibrahim, which
is submitted to the Yang di Pertuan Agong today, and make arrangements
for a Parliamentary debate.
2. The Cabinet at its meeting tomorrow should approve a RM720 million
package, involving three compensations funds for the victims of the worst
virus epidemic in the nation’s history and a RM400 million credit facility
to revive the pig-rearing industry
3. All MPs, whether MCA, Gerakan, MIC or UMNO in the Barisan Nasional
or the Opposition, including PAS, should speak up in Parliament today to
express their support for the RM720 million package to deal with the worst
virus outbreak disaster in the country. I call on MCA and Gerakan MPs to
speak up in support of the RM720 million package, for if they are not prepared
to give their support, UMNO MPs would have good excuse to withhold their
support as well.
(6/4/99)