May 24, 2002

Malaysia an Intriguing Example for SA

Lukanyo Mnyanda, Johannesburg

MUCH has been said about how the rand's 37% devaluation last year had little to do with economic fundamentals, seemingly an example of irrational market behaviour, and a hard lesson for SA and other nations perhaps in a rush to open up their foreign exchange and capital markets. However, SA was hardly the first or last victim.
Who would be brave enough to bet that a country with gross domestic product (GDP) growth at 8,7%, inflation at 3,8%, unemployment at 2,5%, an external debt equivalent to just 42% of GDP and a savings rate of 38,5% would become the victim of a financial meltdown?
But this is exactly what happened to Malaysia during the second half of 1997.
Investors suddenly couldn't wait to desert a country that had been hailed as one of the capitalist success stories of the century, put up as a shining example for others by International Monetary Fund (IMF) experts and other economists.
The Malaysian currency depreciated by 40% in six months, and the stock market plunged.
The consequences for Malaysia were severe and make inflationary fallout from the rand's depreciation last year seem minor by contrast. The financial system virtually collapsed as foreign debt obligations ballooned, construction projects lay unfinished, inflation soared, and millions were thrown into poverty with unemployment tripling.
However, as Malaysia watched decades of development progress evaporate it could count itself relatively lucky.
Thailand, the source of the contagion, saw its currency lose 55% against the dollar, while Indonesia's rupiah slid by more than 80%, resulting in an upheaval that saw former president Suharto's regime fall.
Malaysia also had its fair share of trouble and for a time Prime Minister Mahathir Mohamad's 19-year reign looked in real danger, with former deputy Anwar Ibrahim emerging as a real challenger. Anwar was eventually thrown in jail for alleged homosexuality. He is still there, in a society that prides itself on openness and its embrace of diversity.
The Myburgh commission probing the rand's fall will have got a full report on Malaysia's experience of those traumatic times yesterday from that country's central bank. Unfortunately the hearing was held in-camera, with the Malaysians not willing to discuss their policies and strategies in public.
It was probably in line, though, with Mahathir's protestations that what he calls rogue traders in the west were to blame for Malaysia's troubles then. He glossed over weaknesses in the system including weak financial sector regulation, and overly close relationships between businessmen and politicians.
George Soros, the billionaire currency trader turned philanthropist, "the biggest rogue of them all", has been blamed by Mahathir for "turning tigers into beggars". But Malaysia refused to beg. It declined IMF help, rejecting its prescription of cutting spending and lifting rates.
It took the unorthodox route of imposing selective exchange controls. The good student became a pariah, and Mahathir one of the most vocal critics of globalisation.
He never fully rejected ideas of a western conspiracy to derail southeast Asia's economic development. The fact that much of Malaysia's development was largely based on investment, aid , and generous access to western markets was forgotten.
The first step Malaysia took was to force investors in Singapore holding the Malaysian currency the ringgit to repatriate what they held within a month or face not being allowed to at any future date.
Once this was done, trade in the currency was stopped and it was fixed, at 3,80 to the dollar. Malaysia also placed controls on short-term portfolio investments, imposing an exit tax if capital left before a year. Mahathir credits the controls with Malaysia's economic recovery since the crisis.
He dismisses suggestions they did not really work and that the other tigers recovered despite not taking that route. Instead, he takes credit for their recovery as well. He argues his move scared speculators off, raising the possibility other nations would introduce controls if attacks persisted.
He also argues the collapse of the multibillion-dollar Long Term Capital Management Fund led to the banks ceasing lending to his arch-enemies hedge funds.
Now the dark days of 1998 when the economy had sunk into a recession feel like a bad dream. Helped by expansionary monetary and fiscal policies as well as a recovery in exports, the economy is expected to grow at 3,5% this year. The finances are in good shape. Reserves, at 32bn, are higher than when the dollar peg was introduced.
Even Soros who has now become a philosopher of sorts, railing against the evils of the system that made him rich has praised Malaysia's economic management. Rating agencies have upgraded the nation's ratings, and its latest global bond issue was oversubscribed.
Unfortunately for SA, the usefulness of Malaysia's experience as an example ends there.
Malaysia could defy market orthodoxy mainly due to its superior financial position. It had a fairly big pool of foreign exchange reserves, while its savings rate of almost 40% of GDP and its ability to force the repatriation of offshore ringgit, meant it was not too bothered when rating downgrades frustrated its attempt to raise funds by bond issues.
Japan also helped by providing soft loans and guaranteed its bond issues. SA has no such friends.
So, when the Malaysians have gone, the commission will go back to discussing the effectiveness of existing controls.
It could have been more useful if the debate about the need to reform the global financial system, sparked by the crisis in east and southeast Asia, was still alive.
The debate might be revived in the future. But don't count on it.

Mnyanda is Economics Editor.