Kiyoshi Ota/Bloomberg

Malaysia Rules Out Capital Controls as Currency Plunges

Updated on

Malaysia, which drew the ire of the International Monetary Fund with capital controls 17 years ago, has ruled out doing so again as its currency plunges.

Malaysia remains committed to market-friendly policies, Prime Minister Najib Razak said at a press conference Thursday, repeating four times that there would be no restrictions on capital flows or a fixed rate for the ringgit. Central bank Governor Zeti Akhtar Aziz also said there are no plans to move to a less flexible currency regime.

“The government remains steadfast in maintaining the integrity and openness of its markets, and will not impose capital controls, nor will it implement a peg for the ringgit,” Najib said.

Foreign funds have dumped more than $3 billion of the nation’s shares this year and the ringgit is at a 17-year low as political uncertainty clouds the outlook for an economy rocked by plunging oil prices and an emerging-market selloff. Najib is grappling with allegations of financial irregularities at a state investment company, and facing accusations of impropriety after it was disclosed that political donations ended up in his private accounts in 2013.

The ringgit weakened beyond 4 a dollar for the first time since 1998 on Aug. 12, spurred by the yuan devaluation last week. In July, it slid past the 3.8-a-dollar peg that was set during the Asian financial crisis and kept from 1998 to 2005. It dropped as much as 1 percent to 4.1442 in Kuala Lumpur Thursday.

‘Step Back’

In 1998, then Prime Minister Mahathir Mohamad turned to a fixed exchange rate and capital controls as solutions when faced with a tumbling currency, after earlier denying plans to do so. He blamed foreign investors for the demise of the ringgit and labeled billionaire financier George Soros a “moron” for his part in it.

The IMF, which called Malaysia’s response “a step back” at the time, later acknowledged it was a “stability anchor.”

Malaysia has a “significantly different environment presently” compared with the 1997/1998 crisis, Najib said, adding that the government doesn’t view the currency as reflecting the country’s “strong fundamentals.”

The central bank’s efforts to defend the ringgit -- Asia’s worst performer against the greenback this year -- contributed to the country’s foreign-exchange reserves dropping below $100 billion in July for the first time since 2010.

“We have high levels of reserves and that is what reserves are for -- to represent buffers during this period,” Zeti said Thursday. “We have held more than the amount of reserves our country needs, precisely for reversals.”

Sovereign Risk

The FTSE Bursa Malaysia KLCI Index of stocks has lost 24 percent in U.S. dollar terms this year, the most among Asian benchmark gauges, while sovereign bond risk jumped to a four-year high since the Wall Street Journal reported on July 3 of a money trail of about $700 million that led to Najib’s accounts.

The Malaysian Anti-Corruption Commission said this month the 2.6 billion ringgit ($629 million) in those accounts were from donors in the Middle East.

Najib has faced criticism from some members of his party and opposition politicians for the donations. The receipt of political funds was to meet the party and community’s needs and isn’t a new practice, the official Bernama news agency reported Aug. 9, citing Najib.

Najib on Thursday urged Malaysian companies to consider repatriating liquid assets held overseas in foreign currencies to help support the ringgit. The economy expanded the least in almost two years last quarter.

“We have to be patient and have the degree of resilience to ride out this period of uncertainty,” Zeti said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE