We Don't Need the IMF

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"We are not living in conventional times, and it may be useful to use all the ammunitions available to us (Malaysians) in our fight against the manipulators (Currency Speculators), even if such measures are not normally considered conventional. As they say, everything is fair in love and war!" - Tan Sri Nor Mohamed Yakcop's note to the Prime Minister, Tun Mahathir, dated 21 August 1998

Title: Notes to the Prime Minister : the Untold Story of How Malaysia Beat the Currency Speculators
Editor: Wong Sulong
Author: Nor Mohamed Yakcop (Tan Sri)
Genre: Economics/Politics/History
ISBN: 978-967-5997-42-6
Publisher: MPH Group Publishing
Year: 2011


or Mohamed Yakcop (Tan Sri) is a name that Malaysians should never forget, alongside Tun Daim. Why? Well, if it was'nt for him, Malaysia would have bow down to the super economic powers that invade the third world countries via economic tools such as those blogged in blogpost Beware of the Economic Hitman. Malaysia would have enslaved herself to the International Monetary Fund (IMF) to resolve her economic recession. Tun Mahathir, Malaysia's Prime Minister (back then) had Tan Sri as his core advisor to battle against economic turmoil (just like what Tun Daim was in the 1986 recession). His (Tan Sri) speciality was in the arena of Currency Speculation after costing Malaysia billions of Ringgit in currency dealings which put him out of job in the early 1990's. His expertise, despite the huge losses, was now needed to fix the recession, caused predominantly by Currency Speculators who attacked the Malaysian Ringgit in 1997. This book tells it all.

So what is the story? In a nut shell, a bunch of Currency Speculators played around with the trading of Malaysian Ringgit in huge volumes causing distortions in the supply and demand of the currency. That caused ripple effect, a negative one, to the fundamental users of the currency, mostly businesses and bankers. The book is very highly technical even a Chartered Accountant like me took quite a while to digest and understand. For a lay man, simple illustrations of a real life example is needed. Tan Sri, in his notes to Tun Mahathir, attempted such illustrations. Even that, I find it quite a challenge. Tun is truly a brilliant man, to have understood what Tan Sri wrote in his notes. To demonstrate Tun's level of understanding, the below is his (Tun's) lay man explanation when interviewed at Perdana Leadership Foundation on 3 January 2011:

What happened is that we have moved away from real business onto speculative business on things that don't really exists. You can speculate on the price of sugar, but in the end you have sugar to deliver. But when you speculate on currency, in itself it doesn't have a value. Sugar has a value, gold has a value, but currency in itself does not have value. What is worse was that the speculators were not trading in real cash but they were trading figures recorded in their books. There was nothing to back their figures. Real business is about producing things and selling things. But they make so much money from speculation. Then you have the hedge funds which are able to leverage up to 30 times their funds. They are not dealing with real things, but speculating on figures. They take a bet. That's gambling. They may win or they may lose. But they structured it in such a way that they make money. Once in a while they make a loss. Because of their ability to leverage, the profits made by hedge funds are multiplied. Trade in currency is USD4 trillion a day. That's the total trade of Germany in one year. How can you do that?

There are examples of many countries that bow to the international money lenders with high hope of saving those countries:

INDONESIA

President Suharto of Indonesia had to face a painful downfall when on 15 January 1998, before the world's television cameras, he was forced to sign the terms of the IMF bailout package. It was an image of national humiliation by Indonesians. The week before, the Rupiah had broken 10,000 level against USD, and riots had broken out in Jakarta. In May of the same year, Indonesia had to follow one of IMF's demands as a condition for the release of funds, which was, a sharp increase in fuel prices and closure of 16 Indonesian Banks. God knows who benefited from those terms (at the expense of Indonesia destroying what was already destroyed quite severely).

THAILAND

Speculative bubble was fast building up in Thailand. Thai businessmen would borrow heavily in foreign currencies, often short-term, and invest either in stock market or property developments. They were leveraging on the interest rates differential. The foreign currency loans attracted much lower interest rates than Thai interest rates. As Japanese banks started withdrawing their loans and Japanese investors unloading their assets, liquidity began to dry up in Southeast Asia. Thailand was particularly badly hit as the majority of its loans were provided by Japanese. The overheated Thai market began to deflate and those speculative businessmen were caught in a bind. They were forced to sell thier assets to repay the loans and a ripple effect caused the collapse of the stock market. By July 1997, Thailand had to accept a rescue package from the IMF that demanded the opening up of Thailand's economy especially the financial sector.

MEXICO

Earlier in 1994, Mexico suffered similar fate as Indonesia. Currency Speculators laid seige to the Mexican Peso and by 1995, the Mexican Government had to accept a USD50 billion rescue package from the World Bank, the United States (US) and Western commercial banks. The peso was devalued by a massive 50%. Mexico is a major Latin America country just South of the United States; so how could the US Government and the IMF have been so negligent and unaware of the economic problems that were building in Mexico? Perhaps it was intentionally ignored in view of penning down a rescue package that made Mexicans sell their country?

JAPAN

The Americans also pursuaded Japan to their terms which they succeeded: To appreciate the Yen. For that, the Japanese exporters were under pressure for cost cutting warranting them to move production to cheaper countries. Less employment opportunities were available to Japanese as a result of that. With such high Yen appreciation, Japan had to boost its economy by lowering down interest rates which hit 0.5% in the mids-1990's, close to zero. This overextended period of interest rates led to creation of asset bubble in Japan. Immediately the Yen depreciated which caused Japanese banks to liquidate monies from abroad (Asian) back into Japan. Asia could not withstand a liquidity shock of that scale.

Despite Malaysia's sound economic fundamentals, its economy was not without vulnerabilities: i.e. (i) The local economy was overheating, (ii) asset bubbles were fast emerging, fuelled by the influx of foreign "hot money" and (iii) a large, persistent current account deficits. Malaysian corporations were taking a lot of debt. The economy was growing at 8.5% and loans grew at 18%. Then in July 1997, the Currency Speculators attacked Malaysian Ringgit. This is when Tun Mahathir launched a blistering attack on Currency Speculators identifying George Soros as the principal culprit.

The Ringgit fell dramatically to 3.89 to the USD, followed by the share prices on Kuala Lumpur Stocks Exchange (KLSE) resulting in Composite Index to a low level of 594 causing losses in the market capitalisation of around RM500 billion. Many Malaysians suffered as the value of their USD or Yen loans expanded beyond affordability. Many loans were categorised as Non-Performing Loans (NPL). Foreign investors used NPLs as a measure but of course it was unfair given that Malaysian definition of NPLs are more stringent (i.e. 3 months as opposed to Thai's 12 months).

All these, in the minds of our (Malaysian) leaders, cannot continue in Malaysia. Or else, Malaysia would share the same fate as its neighbours, bowing down to the IMF. Hence, unorthodox measures were taken, masterminded by Tun and Tan Sri. What did these 2 gentlemen do? They did just the below:

1. The ban for Malaysian stocks to trade on Central Limit Order Book (CLOB), a Singaporean based exchange for Malaysian stocks, where continuous selling and short selling of Malaysian stocks, coupled with Currency Speculators' borrowing of Malaysian shares were getting out of control. This had to be stopped. Or else, Malaysian Government cannot put in efforts that can positively repair the stock market conditions. How did we do this? Disallowed CLOB and foreign brokers from Singapore from having Central Depository System (CDS) account in Malaysia.

2. Reduction of interest rates as oppose to increasing interest rates. Increasing interest rates would collapse the stock market further and the in flow of "hot money" for short term depositors are uncertain. It appears that such a suggestion (i.e. increase interest rates) is a tool for foreign funds to dampen Malaysian stock market further and worsen the Ringgit value further so that they can buy (stocks or Ringgit) cheap. In addition, this will cause many projects that were relying on loans to cease and many companies will go into bankrupcy. Such recessional spiral would only put Malaysia into its own grave and never to recover. The Bank Negara had also reduced Base Lending Rate (BLR) from 4% to 2.5%.

3. Rejection of USD12 billion rescue package from a number of countries. Accepting rescue package is obviously the last thing Tun Mahathir and Tan Sri would do given the humiliation suffered by the neighbouring Thailand and Indonesia. IMF would have imposed "opening up" of economy which meant abolishment of certain mechanism in Malaysia such as protection of certain industries (such as automobile) and the Bumiputera economic schemes.

4. Pegging the Ringgit to USD at optimal rate of 3.8 to minimise the effects of external disturbances, to maintain stability of the value of Ringgit, to reduce impact of imported inflation and to allow greater flexibility in monetary policy.

5. Ceasing foreign currency placements by Bank Negara in Europe and the United States and rechannelling those funds to placements in Labuan. Monies that gets deposited in Europe and the United States post restriction to availability of funds to Malaysian companies as European and American banks would rate Malaysia on a higher risk factor.

6. Allowing Malaysian exporters to sell forward export proceeds for 3 months worth of export proceeds (i.e. Selling USD) in order to create demand for Malaysian Ringgit.

7. Loosening of liquidity requirements by Bank Negara via Monetary Policies will make funds easily available for the important sectors of the economy to bring about quick turnaround. Bank Negara had reduced the Liquidity Ratio for banks from 17% to 10% allowing extra RM28 billion extra funds into the system made available for businesses. There was no need for high Liquidity Ratio because Bank Negara was no longer required to be the "captive buyer" of Government Bonds following Malaysia's privatisation exercises as well as the abundance of funds at Employee Provident Funds (EPF) should there be a need for Government Bonds buyers. Bank Negara had also reduced Statutory Reserves Ratio from 8% to 4% releasing RM12 billion funds available for banks to loan out. Bank Negara had also instructed banks to achieve minimal loan growth of 8% by end of 1998.

8. Setting up of "Reconstruction Corporations" backed by Government Bonds will help companies that were under severe problems as a result of the recession. This may include restructuring of NPLs. The Government, under the Ministry of Finance, had set up various "Restructuring Corporations" namely Danaharta, Danamodal and Credit & Debt Restructuring Committee (CDRC) to undertake asset restructuring exercise of bad assets to allow banks and corporations to refocus their efforts to their fundamental business activities. This will allow the rebuilding of corporate Malaysia, hence boost economy.

In all the seriousness of critically managing the economy of the country, Tun Mahathir, a figure known to be thorough, hillariously made a blunder worth sharing with fellow Malaysians as follows:

1 September 1998: It was classic Tun Mahathir. When under seige, he was brilliant. Under the scorching television lights; his explanation about why Malaysia had to impose the unorthodox measures was exceptional in its logic and clarity. Tun asked Tan Sri immediately after the TV announcement "Did I explain it well?" "Sir," Tan Sri replied "you did extremely well but you forgot to peg the Ringgit!"

* kopihangtuah



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