ECONOMICS: Malaysian capital controls
Far Eastern Economic Review
Sept 17, 1998

Some Pains, Some Gains

By Salil Tripathi and Ben Dolven in Singapore and Faith Keenan in Hong
1039 Words


Malaysia and Hong Kong's dramatic interventions in their markets are
having ripple effects throughout Asia. Below, we assess the initial pain
-- but possible long-term gain -- for Singapore of Malaysia's decision
to isolate its currency. We also compare Malaysia's situation with that
of China and India, which also have currency controls. Our final story
looks at whether Hong Kong's ad hoc financial management bodes well for
the territory.
   Most bankers and securities traders in Asia had never seen the likes
of it: One of their main markets was effectively shut down, giving them
just a week to get out -- and with no clear route to the exit. At stake
were billions of dollars of financial instruments, from derivatives to
simple bank deposits.
   After Malaysia placed sweeping controls on its currency, the ringgit,
and on investment in its stockmarkets, Singapore appeared to be the
country in the region with the most to lose: The island republic hosts a
large amount of ringgit trade, it has attracted mountains of ringgit
deposits thanks to interest rates that are higher than Malaysia's, and
it even holds some of its national reserves in ringgit.
   But Singapore may also stand to gain the most in the long run. Its
neighbour's surprise move set the stage for the city-state to
demonstrate its reputation for orderliness and efficiency. Indeed,
within hours of Kuala Lumpur's September 1 announcement, Singapore's
central bankers were drawing up a game plan to cope with the new rules
next door. Its quick, organized response to Malaysia's financial
shutdown could solidify its place as Southeast Asia's premier financial
   The bankers had to move fast. Bank Negara, Malaysia's central bank,
had set a September 4 deadline for unwinding offshore transactions,
namely foreign-exchange forward contracts (agreements between two
parties to exchange currencies at a set rate and future date) that had
been booked through Singapore. After days of working around the clock
and consulting more than 30 banks, Singapore's foreign-exchange
committee issued guidelines for valuing contracts that would come due in
the weeks and months ahead. And it recommended that net settlements be
paid in U.S. dollars.
   Banks and their clients were free to accept the benchmarks or set
their own. "The MAS is trying to be a moderator," says a Singapore-based
banking analyst, referring to the Monetary Authority of Singapore, the
de facto central bank. "It wants to ensure the integrity of the system
and close out as soon as possible. What happens behind the scenes, you
have to resolve with your client." Many used the MAS benchmarks --
including an exchange rate of 4 ringgit to the dollar (slightly weaker
than Malaysia's new set rate of 3.8) -- to settle their contracts,
bankers say. Meanwhile, Bank Negara extended the settlement deadline
twice, most recently to September 12.
   Most bankers were breathing more easily after the initial days of
chaos, but the ensuing fallout will cast a pall over Singapore. About a
third of the staff at any Singaporean brokerage used to focus on
Malaysian shares. "Now they are effectively jobless," says the research
director of an international brokerage in Singapore. Many banks had at
least one or two senior ringgit traders; they will no longer have any
currency to trade. Property-consulting firms will let go agents selling
Malaysian property.
   Since the city-state effectively separated from Malaysia only in
1965, Singaporeans have felt the force of the controls more than others.
Family ties and corporate connections still hold fast between the two
countries. Singaporeans hold much of the 25 billion ringgit ($7 billion)
that Malaysian officials say is outside the country, as well as an
unknown amount of ringgit in Malaysian accounts. They are also heavily
invested in Malaysian stocks, and young families own swaths of seafront
property in Johor, the Malaysian state that borders Singapore.
   Suddenly, they face hard choices. Malaysian officials say offshore
ringgit will be deemed worthless on September 30. Until then, ringgit
held in Singaporean accounts can be easily converted into another
currency. Singaporeans with money in Malaysian bank accounts, though,
cannot take it out of the country before September 1, 1999 -- one year
from the imposition of controls. Similarly, if they hold Malaysian
stocks or property in Malaysia, and sell them now, they cannot take out
the proceeds for a year.
   Private bankers in Singapore say most depositors are opting to
convert their ringgit holdings into dollars at the MAS-set exchange
rate. But if the capital controls were meant to repatriate floods of
ringgit notes, they probably won't work: Malaysians bringing money home
are subject to taxes, and for most offshore depositors, the rates will
be "way in excess of 30%," a Singapore banker says.
   Song Seng Wun, regional economist at G.K. Goh, figures the most
Malaysia can expect in repatriations from Singapore is around 2 billion
ringgit in notes. "It's certain almost all the non-Malaysian depositors
won't want ringgit now," and will convert it into other currencies, he
says, "while a fraction of Malaysian depositors may need the ringgit
onshore and will send money back."
   The Malaysian move hits Singapore in one more critical area: its
stockmarket. For years Malaysia has sought Singapore's support to curb
the Central Limit Order Book International over-the-counter market,
which traded mostly Malaysian securities: Malaysian Prime Minister
Mahathir Mohamad wanted Malaysian shares to trade only in Malaysia.
Singapore, however, encouraged the market, saying it added liquidity to
Malaysian shares.
   According to one estimate, Singapore residents hold more than 200,000
Clob accounts, worth $1.1 billion. After Malaysia decreed that trading
in Malaysian shares could be done only through the KLSE or other
authorized markets, the Stock Exchange of Singapore gave in and closed
   As the settlement deadline loomed, bankers were still trying to
clarify Bank Negara's position on a raft of issues, including the way in
which Malaysian shares on Clob could be transferred to Malaysian
accounts. Also unresolved was how to tackle the many complicated
currency-related deals that involve multiple parties both inside and
outside Malaysia. Having to unwind positions in a hurry leaves some
parties exposed to risk. Says a banker involved in the talks with Bank
Negara: "We have to collapse everything at the same time or be left with
unbalanced positions we don't want to take."