With The Return Of The Managed Float Of The Ringgit, Bank Negara Must Ensure That All The Currency Trading Guidelines And Procedures Are Complied With To Prevent A Repeat Of The US$4 Billion Foreign Exchange Losses In 1993

Press Statement
By Lim Guan Eng

(Melaka, Friday): DAP warns Bank Negara to increase vigilance in its currency trading in the foreign exchange markets to ensure that there is no repeat of US$ 4 billion foreign exchange (forex) losses in 1993, Bank Negara’s largest in history.  With the return of the managed float of the ringgit, Bank Negara must ensure that all currency trading guidelines and procedures to prevent abuse and minimize risk exposure are complied with to avoid the huge US$ 4 billion in losses caused by reckless currency speculation. 

Second Finance Minister Datuk Nor Mohamad Yakcop is best known as Bank Negara’s expert forex trader and yet is the man responsible for Bank Negara’s US$ 4 billion losses. Nor's biggest mistake came in 1993, when Bank Negara bet that the pound sterling would hold against attacks from international currency trader George Soros. Soros won this bet making more than one billion pounds whilst Malaysia lost US$ 4 billion. In the event, Nor and then-governor Bank Negara Governor Jaafar Hussein took "full responsibility" and resigned in March 1994.  

Despite being responsible for such huge losses in 1993, DAP is mystified as to why Nor Mohamad’s was not asked to pay but instead promoted as Second Finance Minister in 2003. US$ 4 billion is a huge amount as it would mean a loss of US$160 to every single Malaysia male, female or child. Nor Mohamad should use the painful experience of his mistakes to advise Bank Negara’s currency traders what to do and what not to do.     

Bank Negara Should Control Inflation And Resist Increasing Interest Rate

With the ringgit depeg Bank Negara has no more excuse for controlling inflation following the Consumer Price Index(CPI) highest rise in 6 years at 3.2% in June 2005 compared to 3.8% in February 1999. This 3.2% rise is higher than Bank Negara’s own forecast of 2.5% for this year. 

The high CPI is principally caused by higher fuel prices and the reduction of fuel subsidies. As most the Malaysia’s fuel requirements are imported, the stronger ringgit should result in lower fuel costs and make imports cheaper. Any failure to control inflation and reduce it below 2.5% would be a failure of professional management and planning by Bank Negara. 

Apart from being able to control inflation, Bank Negara should resist increasing interest rate. Widening interest rate differentials between US$ and the ringgit, and the fact that capital controls have been lifted, will encourage investors to move their money to higher yield investments abroad.  

Bank Negara’s Overnight Policy Rate(OPR) is 2.7% as compared to the US Federal Reserve Bank OPR of 3.25%, and the US Federal Reserve Bank’s Chairman Alan Greenspan’s remarks on 20 July 2005 that interest rates in US$ must continue to rise will only widen the interest rate differential between Malaysia and United States.

Normal capital flows dictate that money will flow out of the system especially if interest rates elsewhere are higher. If the outflow is large, then Bank Negara may be forced to raise interest rates to prevent capital flight. This is the challenge Bank Negara’s faces to keep interest rates low so that business expansion can proceed and Malaysia can achieve its targeted 6% economic growth this year. To keep interest rates low, Bank Negara must keep inflation low. 

Malaysian savings effectively earn negative real rates of return with CPI of 3.2 % as compared to a 3-month bank deposit earns only 3%. Given that most people agree that the CPI understates the real cost of living, especially in urban areas, the real decline in value of your bank savings is therefore much more. Inflation is eating away our savings.   

There are two major causes of inflation, which is essentially cost-push inflation. One, 10% hike in toll rates, 23% rise in fuel prices and goods. Two, the ringgit peg with US$ resulting in an undervalued ringgit because of the weak dollar. With the ringgit depeg, inflationary pressures will not only ease. The ringgit depeg should help to increase product competitiveness globally by reducing reliance on cheap currencies and stepping up efforts to ensure quality and cost efficiency.

Financial Loan Assistance To Small-Medium Industry Exporters

However Bank Negara should take steps to assist exporters who face losses following this sudden depeg of the ringgit to a managed float. The government has a responsibility towards exporters who had believed in the repeated assurances during the past several months given by Prime Minister Datuk Abdullah Ahmad Badawi, Nor Mohamad and Bank Negara that the ringgit will not be depegged. 

Even though Malaysia may have no choice but to depeg following the renminbi’s depeg from the US$, the government should help out exporters who have committed their trade based on such false assurances by the government. A 5% difference caused by the appreciation of the ringgit can represent their entire profit margins. DAP suggests a special financial fund or loans assistance to assist small-medium industry exporters to overcome their losses and weather higher costs from the sudden depeg of the ringgit. 

For a currency to remain in a position of strength, the underlying economy must have sound fundamentals, stable balance of payments, a trade surplus, rising international reserves and very little external debts.  Malaysia may have stable balance of payments, a trade surplus and rising international reserves of RM 285 billion but its external debts are still substantial.  

These are the 5 new challenges that Bank Negara faces:-

1.      to impose an oversight mechanism to effectively prevent any repeat of the shameful US$ 4 billion forex losses in 1993;

2.      have no excuse not to control the inflation rate to rise beyond the present 3.2%;

3.      taking steps not to increase the interest rate with the OPR at 2.7%;

4.      providing financial assistance to small and medium exporters to weather the losses from the sudden depeg of the ringgit; and

5.      reducing our exposure to external debts to ensure a stable ringgit.

(22/07/2005)