Malaysians return to path of severed noses
How short memories can be. People who find themselves astonished at the lengths to which the Malaysian Government is prepared to go in its drive to eliminate foreign speculators from the Malaysian markets need look back only a few years to find an example of similar extraordinary measures.
From 1991-93, the Malaysian authorities were concerned with keeping inflation down and, to do this, pushed interest rates well above equivalent levels in the United States and in neighbouring Singapore.
At the same time, they were determined to keep their currency, the ringgit, stable at about M$2.50 to US$1. Overseas players, offered high interest rates in Malaysia with no currency risk, poured money in.
The inflow would ordinarily have pushed the ringgit up, but Malaysia's manufacturing lobby is a strong one and argued against it. To keep the ringgit stable, the central bank, Bank Negara, bought up the foreign currency inflows in exchange for the ringgit the foreigners wanted.
Then Bank Negara began to run out of ringgit, but this was no immediate problem. It issued central bank debt paper to raise more ringgit and continued passing it out for foreigners' dollars.
However, having pushed ringgit interest rates up, Bank Negara had to pay those same high rates of interest on its ringgit debt paper and they were much higher than the interest rates it was getting on the dollars it had bought. It was taking ever-rising operating losses.
There was another easy solution. It decided to make up the shortfall by profits from currency trading and made itself a reputation as one of the world's biggest currency speculators. These are the people, remember, who now decry currency speculation.
But this introduced another difficulty. Bank Negara was not always the most savvy currency speculator. When former British prime minister John Major pledged to support sterling, Bank Negara believed him and lost a fortune when the pound collapsed. By the end of 1993, it was looking at mammoth losses, both operating and trading.
Once again there was a quick and easy solution. Buy even more foreign currency and this time so heavily as to abandon the M$2.50 currency fix and drive the ringgit up.
In this way, come its December 31 balance-sheet date, it could show that its foreign currency holdings were worth more in ringgit than when they were bought and thus book a foreign exchange translation gain to offset its losses.
The foreign currency purchasing become so heavy that it briefly drove the ringgit exchange rate as high as M$2.90. It also drove Bank Negara's foreign-asset holdings to US$34 billion, or the equivalent of 55 per cent of gross domestic product.
Others saw what was happening, among them Malaysia's nemesis, George Soros, already on the other side of the sterling gamble that Bank Negara lost. They made big bets that the ringgit would tumble again in the first few trading days of 1994.
This infuriated the Malaysian authorities, who quickly introduced new rules preventing foreigners buying anything but Malaysian stocks with their ringgit, charged them rather than paid them interest on their ringgit cash balances and continued to prop up the ringgit.
The foreigners eventually gave in and may have taken losses. The losses Malaysia suffered, however, were greater. Yet there has never been much sign of contrition in Kuala Lumpur.
The moral is that these people in Malaysia will gladly cut off their nose to spite their face if you get them angry. Don't wind up Dr Mahathir if you want him to see sense.