1994Vol14no.3

H§_ n‘____ W ' , I ..; ‘iii-M A/v\~<"£-y‘>\<s§Q_¢ _ a_ WI.:;& ~ _J____V_‘_V n.@~' ~ ii :":i; :1 at I % er t::;:3§ 3 ~'" ;;.1_ M;§§‘I:¥€-?:=l+=? $2‘-'= _“__ .4»-v‘¥:k;; %,<““'~_;'_”;'1k;:;-e=_,;; ,,,,‘--= 9J"~~ ‘$25F ** $3 “ ' [I V. 9, ’. ‘r W ~55 '1 =5. é 6 . ii». /i/4,'>>r ‘ II : 3 SAMY, TAKE ME TO COURT REFLECTIONS AFTER SABAH ELECTIONS DON’T SACRIFICE OUR SCHOOLS » Bank Negara Govemor Tan Srl Jaffar Hussein II! iii?‘ % %4 Why has the ringgit been weakening at a time when our economy is growing at an impressive rate? Some analysts believe that Bank Negara has Intentionally weakened the ringgit to camouflage more huge foreign exchange losses which were incurred in 1993. RAM expJores the recent moves by Bank Negara In the financial markets. Letters.. ••12 ; Thinking aHowed ... 19; Heart to heart...23; Samy, take me to court. .. 24; Why are we sacrificing our schools in the name of deve1opment? ... 27; Health loses out to arms trade... 29; Housing for the poor. .. 31; Current Concerns... 33; Hotel Metropole: Parti Gerakan responds... 40 Alira11 Monlhly 1994:14 (J) Page 2 n the middle of December, our for ships by MISC and aircraft by By pushing the ringgit down, currency stood at 2.55 ringgit for MAS. Export growth has tapered off Bank Negara is thus able to make its Ione US dollar. By February, the from a heady 30% in early 1993 to a fmancial position (foreign reserves local unit had fallen by more than more moderate 12%, but is still very translated into ringgit terms) look 7%. As the ringgit declines, more credible given the weak economies better. Some believe that the central ringgit is required to be exchanged of Japan and Europe. bank needed to make these cosmetic for foreign currency. In February, at adjustments to offset massive losses its weakest point so far this year, as BNM SEUJNG RINGGIT? in foreign exchange (forex). In 1992, much as 2.79 ringgit was needed to Ifit isn't economic fundamentals Bank Negara lost RM12 bn (includ convert to one US dollar. Since then that have pushed the ringgit lower, ing positions that had not been the ringgit has risen slightly. but still what is the explanation? cleared out). The central bank should remains more than 6% have learnt its lesson and lower than its levels in ceased dabbling in forex. mid-December against Instead, some believe that most currencies. Bank Negara' s bigger los Why has the ringgit ses in 1993 were com fallen? Economic fun- parable to 1992. damentals of the The truth about Bank country have not Negara's losses will only deteriorated. Latest be known when it releases figures indicate that the its report some time at the economy grew by 8.1% end of March or early in the third quarter of April. But if it is true that 1993, one of the fastest .............~. the central bank has lost growth rates in the substantial amounts yet world. Projections of IJ Si$l± &Bl I 21 1 I again, it would explain economic growth for why the central bank 1994 are being revised would want to push down up by most economists u the ringgit in an attempt to to about 8.5%. if it is true that the make its financial position Inflation has been central bank has lost appear better than it is. capped at under 4% for After the ringgit feU at most of 1993. Of late substantial amounts yet the end of last year, there higher food prices have was an initial rally in the resulted in inflation again, it would explain why currency in t11e first few figures being slightly the central bank would days of 1994 that saw the higher. But this can be ringgit recover about half attributed to Chinese want to push down the of its losses. International New Year and Hari currency speculators, Raya falling just one ringgit in an attempt to spotting that the ringgit month of each other, had fallen but not due to resulting in a rather high make its financial position any substantial change in but temporary increase appear better than it is." economic fundamentals. in demand for foodstuff. appear to have come in to After the festivities are buy the ringgit in anticipa over, food prices should tion of a recovery in the come back to normal and overall It appears that in the last week of currency. inflation for 1994 is not likely to be 1993, Bank Ncgara sold quite large However, they were in for a higher than 5%. amounts of ringgit to commercial shock. Beginning January and until Our trade balance has improved banks. This pushed the currency to a February, Bank Negara announced a from a swplus of RM8.6bn in 1992 low at year-end when the central series of measures to reduce specula to an even larger swplus of RM 11 bn bank revalues its currency positions. tion in the ringgit. In effect, Bank estimated for 1993. Although of late A lower ringgit means that foreign Negara made these speculators lose there has been higher growth of im currencies held by Bank Negara out on interest when they bought the ports, much of this is due to orders tr.mslate to higher ringgit amounts. ringgit. Alira11 Monthly 1994:14 (3) Page 3 Currency players who buy a cur worth of Malaysian bonds, issued by b~. these speculators add li rency would m gcner..tl expect some the Ministry of Finance as well as quidity to the banking system. Local interest payment in holding that cur Bank Negara, which will mature in banks get excess funds through rency, through parking the funds the coming months. foreign speculators converting their with local banks. One of the ad· When these bonds are repaid, the currencies into ringgit and parlcing vantage of holding this ringgit with our ringgit was that it offered banks. relatively high interest Too much funds rates. A currency player being held by the banks could borrow US dollars leads to lower interest and pay an annual inter )::;;~~==~ rates. Each bank quotes est rate ofabout 3% while ill , slightly lower interest converting it into ringgit rates for those who want he would earn about 6% to park funds with it, ef through keeping the fectively telling the cus funds with local banks. tomer, or foreign Thus he could potentially speculators, to go else make double-barclled where. With all banks profits· from the interest doing this. interest rates rate dtfTerential as well as comedown. potential exchange rate Bank Negara, how appreciation of the local ever, does not wish to see currency. interest rates come ofT too much as this could RESTRICTIONS spark inflation. Lower in TO CURB terest rates may boost SPECULATION "The net effect of lower consumer spending as in Instead, beginning interest rates is to increase dividuals find they have February 1994, Bank to JX.IY the banks less on Negara required local both consumption and their borrowings and thus banks to distinguish the increase their credit card accounts of locals and investment expenditure. spending, take up more foreigners. Those of for And when spending goes hire-purchase loans to eigners would not eam buy higher priced items any interest unless they up generally so does etc. were for investment in In addition, manufac manufacturing or related inflation." turers may find that lower to tr.1de. Some foreigners interest rates make more foreigners who no longer see any investment projects look viable as it were even charged negative interest viable shorHerm investments in the costs less to finance these projects. as tJle local banks were made to incur country. will be likely to repatriate a small cost in holding these funds. their funds. This would mean further Thus. these companies take up more Thus, the lure of higher interest loans and increase their investment selling of the ringgit which could expenditure. rates for holding ringgit was keep the currency soft for the com eliminated. ing months. The net effect of lower interest In addition, becau~e the central rates is to increase both consumption bank made it clear tt did not en CONTROLLING and investment expenditure. And courage foreigners taking positions INFLATION when spending goes up gcnem.lly so in the local currency, some who had Why should Bank Negara be so docs inflation. Prices get marked up owing to increased demand. ringgit positions appear to have sold concemcd about foreign speculation Til us, foreigners buying massive out. This selling of the ringgit. at a in the ringgit? After all, most of the amounts of ringgit and parking it time when other speculators were foreigners are buying ringgit, show discouraged from buying, resulted in ing faith in the currency and, thus with local banks put downward pres sure on interest rates and could spark the ringgit weakentng in January on indirectly, our economy. wards right till February. higher inflation. Foreign investors arc believed to However, by buying ringgit and To offset this, Bank Negara has be still holding billions of ringgit keeping the funds in Malaysian withdrawn funds from the domestic Alira11 Mcmthly 1994:14 (J) Page 4 banking system, through borrowing the local currency may have given previously he was making a profit ringgit from the commercial banks. Bank Negara officials added margin of 10%, then because of the But the central bank has to pay inter motivation to get even with these higher cost of imports which make est on these borrowings and the cost international players. up most of his overall cost, he may to Bank Negara is thought to total up find that his profit margin has effec to more than a few billion ringgit.

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