Economists brush aside need for capital control measures in Malaysia

Central bank says governor’s comments taken out of context

PETALING JAYA: Pundits have brushed aside the need for capital control measures in Malaysia, a delicate subject matter that resurfaced after the governor of Bank Negara reportedly said that volatile Asian economies should be allowed to use capital controls to pre-empt financial crises.

Datuk Nor Shamsiah Mohd Yunus’ ( pic) statement raised concerns on whether capital controls may make their return to Malaysia, along the lines of the measures imposed during the 1998 Asian financial crisis.

In a news report on Oct 16, the Financial Times reported that Bank Negara governor Nor Shamsiah had spoken about the need for capital controls as a monetary policy, despite the long-running scepticism among policymakers on such measures globally.

She was quoted as saying that countries in the region should be allowed to use capital flow regimen policies as a legitimate policy tool that can be deployed in a pre-emptive manner to deal with potential risks to financial market stability.

“I think there is still a lot of stigma in the use of capital flow [management],” the Financial Times quoted Nor Shamsiah as saying.

However, an official from the central bank told StarBiz that Nor Shamsiah’s statement was taken out of context and was said as part of an academic discussion.

“During a panel discussion, the governor spoke of available monetary policy options for the region and she did not say that such measures would be undertaken in Malaysia. It was merely an academic discussion,” said the official.

Economists and foreign exchange strategists dismissed the need for capital controls.

AmBank Research chief economist Anthony Dass said that it was “fairly premature” for the central bank to opt for capital control measures, unless the ringgit weakens significantly.

“If the depreciation turns out to be drastic, it would further add pressure on the country to finance its US dollar-denominated debt, likewise for other emerging-market countries with high US dollar-denominated debt.

“Such pressure may potentially provide justification for capital controls to come into the picture,” he said.

FXTM global head of currency strategy and market research Jameel Ahmad told StarBiz that capital controls were not needed and are “unlikely” to be implemented, considering the fact that the ringgit is one of the best-performing currencies in Asia this year.

He cautioned that the risk of capital controls or “even the wording of potential capital controls” would always threaten investor sentiment in any economy.

“But there is minimal threat of capital controls being needed in Malaysia and any expectation other than that is very premature,” stated Jameel.

However, according to the World Bank group representative to Malaysia and country manager Firas Raad, Nor Shamsiah has rightly pointed out that capital control measures are among the useful tools during times of financial crisis.

“Many lessons have been learned globally since the Asian Financial Crisis 20 years ago – that under the right circumstances, selective and temporary controls can form part of an effective policy mix to help stabilise capital flows during periods of crisis and contagion.

“That said, at the present time, Malaysia’s economy continues to rest on sound economic fundamentals with diversified sources of growth, prudential regulation of the financial sector, adequate reserve coverage, manageable external debt and a flexible exchange rate that serves as a shock absorber – all of these help to preserve stability during a time of growing external risk,” said Firas.

AmBank’s Dass, who is not expecting any capital controls, said pressure to impose restrictions on the flows of the ringgit would build up if the international reserves drop or approach the US$80bil level.

“Should the country’s reserves continue to drop and approach around US$80bil or six months of retained imports, the pressure on the currency to be pegged would get louder,” he said.

Currently, Malaysia’s international reserves stand at about US$103bil, which is sufficient to finance 7.4 months of retained imports.