Wednesday, November 24, 2010

Capital Controls For Malaysia? Not Yet

Charles Santiago of the DAP is calling for capital controls:

Govt urged to consider capital controls

KUALA LUMPUR: An Opposition MP has urged the Government to view capital controls as a protective policy to insulate the local economy from destabilisation.

Charles Santiago (DAP-Klang) said China, Indonesia, Thailand, Brazil, South Korea and other developing countries had recently adopted such a policy.

"Capital controls should be viewed as a policy response 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," he said in a press conference at the Parliament lobby here Tuesday…

…He added that developing countries, including Malaysia, would experience a further surge of hot money flooding the stock, currency and property markets, leading to asset price bubbles and higher inflation…

…Deputy Finance Minister Datuk Donald Lim said the ministry and Bank Negara Malaysia were monitoring hot money.

You might also want to check out Hafiz Noor Sham’s highly relevant comments on this same subject here.

Personally, I think talking about capital controls for Malaysia is premature – and probably irrelevant. While we’ve definitely benefited from hot money flows over the past year, Malaysia hasn’t been as big a beneficiary as others. Nor have hot money flows to emerging markets been as destabilising as many think – see this post on the Forex Blog for a better idea of what the impact has been.

Just because we are an “emerging market” doesn’t mean Malaysia has garnered its fair share of global excess liquidity. Although the KLCI is pushing against its all time highs and the Ringgit continues to climb, neither is exactly acting like shooting stars – the advances have been steady, not spectacular. And BNM’s forex intervention, even as modest as it was, has been effective in reining in the Ringgit’s appreciation against the USD (and incidentally, prompting a pullback on the cross-rates).

Will QE2 change things? I don’t think so, partly because the Fed’s bond purchase program is far smaller than QE1 and spread over a longer period, but also because the Fed is purchasing Treasury Bonds, and not MBS as well. That means the holders will likely be more risk averse, and less likely to deploy the proceeds to riskier assets and markets.

So while I’m not opposed in principle to capital controls – quite the opposite – there’s just no call for them yet.


  1. Hishamh, I don't agree.

    Yes, Malaysia don't have much direct effects as a result of QE2 like China/Japan do, who hold so much of US dollars in bonds. Thus, we seen the price escalated in China as a result of expand monetary move from US early Nov. Also, China & Russia already announced to quit dollars for bilateral trade!

    Malaysia will seen domino effect from these Asian countries because we're small enough not to be insulated from it.

  2. None of the telltales in Malaysia are blinking:

    1. M2 growth have been steady over the past year, and well below 2005-2008 peaks;
    2. BNM is doing selective not wholesale forex intervention, which is also fully sterilised;
    3. Net foreign assets in the banking system has climbed, but its still below the peak seen in 2007-2008;
    4. My best estimates for capital flows still shows net negative since early last year;
    5. Balance of payments data is also showing net negative capital and portfolio flows so far this year.

    Portfolio inflows into Malaysia is being matched by direct investment abroad by Malaysians. The net impact is actually slightly negative. There's simply no point to capital controls right now.