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Charles Santiago

Posted by : Admin Direktori Blog | Isnin, 22 November 2010 | Published in

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Charles Santiago


சார்ல்ஸ் சந்தியாகோ வாழ்த்து!

Posted: 22 Nov 2010 10:07 PM PST

 

 

மூலம் :- மலேசியா நண்பன்

 


Malaysia Should Consider Adopting Capital Controls to Protect Local Economy.

Posted: 22 Nov 2010 09:55 PM PST

Malaysia Should Consider Adopting Capital Controls to Protect Local Economy.

Second Finance Minister Ahmad Husni Hanadzlah in an interview with Bloomberg a week ago indicated that the government is not considering capital control at this time.

He argued that the country was benefiting from the capital inflows and the appreciation of the ringgit is not affecting the property market as in other countries.

His views run contrary to prevailing practises of important Asian governments and recommendations of the World Bank, IMF, the G-20 and prominent economists such as Nobel Laureate Joseph Stiglitz.

The recently concluded G-20 meeting in Seoul indicated that emerging markets facing a surge in speculative capital inflows could impose regulatory mechanisms in order to stem asset bubbles.

These groups are of the opinion that emerging markets need to adopt capital controls in order to regulate the huge inflows of hot money (speculative funds) which has the potential of destabilising economies and financial systems, as experienced in 1997 by the region, including Malaysia.

Clearly, the view expressed by these international financial institutions and governments is a call for a cautious approach towards speculative capital inflows.

In fact, Bank Negara in a recent statement indicated that there should be greater vigilance on possible risks as a result of large volatile capital flows.  The central bank recognises potential destabilising tendencies with huge in-flows of funds.

Hot money has a tendency to create asset bubbles in the – currency, stock and property markets.

In fact there is evidence that hot money is also going towards commodity speculation including food and oil thus creating inflation tendencies in the developing south including Malaysia.

In 2009 about USD 9 billion flowed between developed and emerging economies. However, since January-September 2010 about USD 46 billion (RM 143 billion) flowed from developed to emerging markets.

Two recent trends warrant the government to urgently consider imposing capital controls:

First, in the last couple of months the values of the local and regional currencies and stock markets have appreciated significantly.  The Ringgit appreciated by 9.5 per cent against the USD. And the   country’s FBM KLCI rose by 18.3 percent in the last eleven months.

ASEAN countries including Thailand are experiencing a similar phenomenon.  The value of the Baht increased by more than 10 per cent against the US dollar and in October 2010, hit a 13-year high against the dollar. Furthermore, the Thai stock market bench mark increased by 40 per cent.

Second and more recently, the US Federal Reserve announced that it will spend USD 600 billion (RM 1.8 trillion) to purchase US Treasuries over the next eight months period.  This phenomenon is known as quantitative easing (QE2)

USD 600 billion is equivalent to 1 percent of global GDP.

Developing countries including Malaysia will experience a further surge of hot money flooding – stock, currency and property – markets leading to asset price bubbles and higher inflation.

Malaysian exporters will be affected by the appreciation of the ringgit, leading to a loss of competitiveness and job losses in the export sector. The ringgit appreciation could lead to a further decline in exports.

With interest rates near-zero in developed economies such as U.S. and Japan, investors will move money into emerging markets in search of higher returns.

Thus, capital controls should be viewed as a policy response in order to regulate speculative capital in order to protect the domestic economy from volatile capital flows.

Malaysia's hesitation in adopting capital controls could be due to a perception and fear that it will further damage the country's economic standing and competitiveness in the eyes of investors.

However, the government should be encouraged to view capital controls as a protective policy to insulate the local economy from destabilisation, a phenomenon recently adopted by other developing countries such as China, Indonesia, Thailand, Brazil, South Korea etc.

On November 4, prior to the G-20 meeting, the South Korean Ministry of Strategy and Finance has this to say about adopting capital controls: “The government believes it needs to turn away from the perception that controlling capital flows is always bad and consider introducing measures to improve the macroeconomic prudence,”

Talking points:

At present, Asian economies such as Thailand, Taiwan, China, South Korea and Indonesia have introduced different types of capital controls.

Earlier in June, Indonesia introduced what financial analysts describe as a  ”quasi-capital control measure” by making short-term investment less attractive to foreign funds.

In October 2010, the Thai government introduced a 15 percent tax on short-term inflows into its bond market.

The Chinese government indicated last week that they would tighten controls on equity investments made by foreign firms in the country
In October, Brazil raised the tax on foreign purchases of fixed income securities to 6 percent. Thailand imposed a 15 percent withholding tax on foreign purchases of Thai bonds in the same month.

 

South Korea is also contemplating the reintroduction of tax on foreign purchases of Korean bonds. In the coming months, more and more countries may opt for capital controls to protect their economies from volatile flows.

 

Contrary to popular perception, capital controls have been extensively used by both the developed and developing countries in the past.

 

Capital controls were regarded as a solution to the global chaos in the 1930s. They were extensively used in the inter-war years and immediately after World War II.

 

Charles Santiago

Member of Parliament, Klang.


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