In the latest issue of TIME magazine cover-dated November 1, 1999, David Roche, head of Independent Strategy, a London investment firm, wrote a very pessimistic article about Malaysia’s economic recovery under the heading: "Lessons Never Learned - It's only a matter of time before Malaysia's economic boom goes bust".
In the article, David Roche wrote:
"But investors are greedy and their memories short. They will forget about the capital controls Prime Minister Mahathir Mohamad imposed in September 1998. They will ignore the jailing of his former deputy, Anwar Ibrahim, and others. And they will be deaf to the echoes of Mahathir's attacks on foreign speculators. Instead, they will try to buy into the boom and then get out - nimbly - before the bust.
"How will this bubble be inflated? Like many other crisis-hit Asian countries, Malaysia has generated a rising trade surplus, producing an increased inflow of foreign exchange. Unlike the others, however, the government has barred its citizens from holding foreign investments and currency, which means the extra capital has been trapped at home. So foreign-exchange reserves are inflated by returning capital. Korea, Thailand and Indonesia have maintained tight monetary policies - their currencies rose along with their equity markets. Under the cloak of capital controls, however, Malaysia's central bank, Bank Negara, has kept the ringgit fixed and turned its increased foreign-exchange inflows into domestic currency to boost bank coffers.
"Malaysia's economy took longer to rebound than Korea's or Thailand's. But now economic activity is rising, boosted by huge government spending on infrastructure to the tune of 8% of GDP this year, with more to come in 2000. Exports are soaring, underpinned by a cheap ringgit and strong global demand for semiconductors, of which Malaysia is a major producer. Some capital controls have also been relaxed, and a few foreign investment advisers have restored Malaysian shares to their emerging-market indexes.
"Now, to curry popularity, the government will probably remove the remaining capital controls. But it will keep the currency pegged at 3.8 ringgit to the U.S. dollar. Continued foreign-exchange inflows will exert upward pressure on the currency. But Bank Negara will just convert those dollars into ringgit, flooding the economy with excess liquidity and cutting interest rates instead.
"Finance Minister Daim Zainuddin is a businessman. He wants cheap credit for corporations. He's not thinking of sustainable economic growth. So while some of the newly created liquidity will flow into investment—raising industrial production and export capacity along the way - the allocation of capital will be distorted by the undervalued ringgit. A cheap currency will keep out imports. Too much investment will be sucked into producing goods (like Proton cars) to substitute for the loss of more efficiently produced imports. And, just as before, a lot of the credit will end up in the stock market or in property speculation. So Malaysian assets will soar - only to fall again."
When he presents the 2,000 Budget tomorrow, Daim should in particular respond to the charge that he would be more concerned about getting cheap credit for corporations rather than thinking about sustainable economic growth.