MALAYSIA'S CURRENCY CONTROL MEASURES

Mr Chng Hee Kok asked the Minister for Trade and Industry what is the extent of the impact of Malaysia's currency control measures on our economy.

Dr Lee Tsao Yuan asked the Minister for Trade and Industry whether Malaysia's imposition of capital and exchange controls will have any adverse effect on economic cooperation in ASEAN.

The Minister for Trade and Industry (Mr Lee Yock Suan): Mr Speaker, Sir, may I have permission to answer Question Nos. 5 and 6 together, as they are related?

Mr Speaker: Yes.

Mr Lee Yock Suan: Given the close interdependence of the Singapore and Malaysian economies, it is inevitable that Singapore will be affected by Malaysia's capital and exchange control measures. The closure of CLOB is an immediate consequence.

Activity in Singapore's foreign exchange market has been reduced by the cessation of Ringgit trades. However, trading in Ringgit had already declined over the past months and was only a small proportion of total turnover just prior to the exchange controls. There will also be some loss of business for our banks and fund managers as they can no longer accept Ringgit deposits or trade in the currency. Offshore loans to Malaysia through Singapore's Asian Dollar Market, albeit a small share of total offshore loans, could also be affected.

The measures are also likely to affect bilateral trade. Companies with substantial Ringgit contracts have to re-negotiate their contracts and financing arrangements. There will be additional administrative costs as all settlements must now be in foreign currency. A double conversion cost is incurred as traders have to convert their export earnings into Ringgit and convert their Ringgit to foreign currencies to pay for imports. The ease of getting Bank Negara's authorisation for obtaining foreign exchange for trade and for profit repatriation purposes will be critical. Any bureaucratic delay will mean higher business costs.

About 60% of our trade with Malaysia are intra-firm, intra-MNC trade. These are mainly denominated in US Dollars. These operations are unlikely to be affected much by the recent measures. Only about 6% of bilateral trade are denominated in Ringgit.

The measures will also mean a drop in Malaysian investments into Singapore as there will be limits imposed on Malaysian investments abroad. However, such investments account for only a very small percentage of total investment inflows into Singapore.

Another concern is the potential downgrading of investor interest in the region. The outlook for foreign investment has already weakened because of the regional crisis. Uncertainty arising from Malaysia's capital controls may further discourage foreign investors.

Malaysia's capital controls represent a step backwards in ASEAN's efforts to liberalise its trade and investment environment. ASEAN will have to work harder to bring back investor confidence into the region. The ASEAN Economic Ministers who met last week in Manila have endorsed the Framework Agreement on the ASEAN Investment Area to enhance the investment climate in ASEAN. Singapore will continue to work with other ASEAN members to press ahead with further economic cooperation and trade liberalisation.

On the positive side, if the measures are temporary in nature and the Malaysian government makes use of this period of stability to bring about the necessary reforms, we can look forward to an earlier recovery of the Malaysian economy.

Mr Chng Hee Kok: Will the Minister be able to quantify what is the direct impact?

Mr Lee Yock Suan: Sir, it is too early to make an accurate assessment. I do not have any figures at the moment.

Dr Lee Tsao Yuan (Nominated Member): Is there any sense that the other ASEAN countries are slowing down on their liberalisation momentum because of this recent event, including Malaysia's imposition of exchange controls?

Mr Lee Yock Suan: Mr Speaker, Sir, I just came back from the Manila meeting last week. My assessment is that the ASEAN Economic Ministers are aware that, in fact, with this current crisis, it is all the more important for them to open up their markets and stay on track as far as trade liberalisation is concerned. Of course, they are closely watching the Malaysian situation. And even Malaysia is keen to attract foreign investments. So we were discussing the possibility of maybe bringing forward the implementation of the ASEAN Free Trade Area as a strong signal to the market that we are on track and, if anything, we want to push forward even more vigorously with trade liberalisation.

Dr Lee Tsao Yuan: Is there any sense that there is a thinking among the ASEAN countries to impose capital controls as well?

Mr Lee Yock Suan: Apart from Malaysia, my assessment is that countries like Thailand, Indonesia and the Philippines and others, are not taking up capital controls. I think Mr Ginandjar has mentioned something about the possibility of getting their traders to convert their export earnings back to rupiah. So this is something that has to be watched. But the overall tone is that they are aware that these capital controls, in fact, will be a step backwards and it is better to keep the market open and leave the current situation on exchange controls as it is.