(Petaling Jaya, Friday): The Prime Minister, Datuk Seri Dr. Mahathir Mohamad would have made two signal contributions to the downward plunge of the Kuala Lumpur stock market in the past week, with the Kuala Lumpur Composite Index (CI) continued on its nose-dive from 795.84 points on National Day Eve to 743.64 - a 52.20-point descent and the bottom has not been reached as the stock market fell by another eight points at the close of trading this morning.
The first was his 43rd Merdeka Day Message, whose anti-foreign rhetoric raised anew whether foreign funds are welcome in Malaysia, and the second, his uncompromising statement in Chicago on Monday that the ban on trading of the ringgit will only be lifted if the International Monetary Fund (IMF) stops the people from trading currency - which is as good as declaring that Mahathir’s currency controls are cast in stone and will last as long as he remains Prime Minister as there appears to be no way that the IMF can ban currency trading.
Both these statements are not calculated to enhance investor, both national and foreign, confidence and would have contributed to the downward plunge of the local bourse.
Despite Mahathir’s uncompromising Chicago statement, the time has come for Malaysia to phase out the capital controls before more harm is done in marginalising the Malaysian economy.
At the latest, the Finance Minister, Tun Daim Zainuddin, should use the 2001 budget presentation in Parliament next month to begin to dismantle the capital control measures first introduced in September 1998.
I had repeatedly said in Parliament in 1998 and 1999 that the DAP is
not opposed to the capital control measures as extraordinary times may
require extraordinary measures. The question is the timing and efficacy
of the capital control measures which has remained a matter of controversy.
The general consensus of independent and non-partisan economists and
analysts inside and outside the country is that capital controls
had almost no impact either in benefiting or damaging Malaysia's economy
because they were imposed when they no longer mattered as by mid-1998,
Asia had fallen as far as it was going to economically and the problem
task was "no longer breaking the fall, but managing recovery".
If Mahathir’s truculent statement in Chicago is to be believed, capital controls and a ban on currency trading of the ringgit are here to stay, since the world is unlikely to bend to his views on currency trading.
The implications of this stance, in the longer term, are dire. While many analysts are willing to concede that the pegging of the ringgit and capital controls – in whatever form – may have been appropriate as temporary measures to provide breathing room for structural reforms to cope with the adverse effects of the Asian Economic Crisis, they are no solutions to Malaysia’s problems in the longer term.
Capital controls and Mahathir’s anti-foreign rhetoric are major factors why foreign institutional investors have marginalised the Kuala Lumpur stock market from one of the largest markets in the Asia-Pacific region outside Japan to an inconsequential one.
We are now beginning to see the adverse effects: much needed foreign direct investment (FDI) and portfolio investment funds are now a trickle of what they were prior to the crisis. What should be a matter of grave concern is that long established international corporations in Malaysia are now contemplating relocating their operations to other countries.
Other crisis-affected countries have seen a resumption of flows – but not Malaysia. Mahathir should heed the advice of his recent guest, Singapore’s Senior Minister Lee Kuan Yew who called on countries in this region to accelerate the pace of reforms in order to remain competitive vis-à-vis the countries of North East Asia in attracting capital flows.
The nation has lost two valuable years. There should be real corporate restructuring – not bailouts - greater transparency in both the corporate and public sectors, sound macro-economic policies that are seen as credible by the markets; investment decisions that are based on economic criteria rather than ego-boosting mega projects that introduce distortions; investment in education to equip this country to remain competitive in the new knowledge-driven world economy and a restoration of credibility in the financial, judicial and market- driven institutions in the country. Were the right policies in place, Malaysia could regain credibility as an investment destination.
The alternative to urgent actions in these directions is an unsustainable
economic recovery and a marginalization of the Malaysian economy
in the longer term, dissipating the hard-earned prosperity and the fruits
of past labours.
(8/9/2000)