Some Pains, Some Gains

Far Eastern Economic Review Sept 17, 1998

By Salil Tripathi & Ben Dolven in Singapore and Faith Keenan in Hong Kong

Malaysia and Hong Kong's dramatic interventions in their markets are having ripple effects throughout Asia. Below, we assess the initial pain--but possible long-term gain--for Singapore of Malaysia's decision to isolate its currency.

MOST bankers and securities traders in Asia had never seen the likes of it: One of their main markets was effectively shut down, giving them just a week to get out--and with no clear route to the exit. At stake were billions of dollars of financial instruments, from derivatives to simple bank deposits.

After Malaysia placed sweeping controls on its currency, the ringgit, and on investment in its stockmarkets, Singapore appeared to be the country in the region with the most to lose: The island republic hosts a large amount of ringgit trade, it has attracted mountains of ringgit deposits thanks to interest rates that are higher than Malaysia's, and it even holds some of its national reserves in ringgit.

But Singapore may also stand to gain the most in the long run. Its neighbour's surprise move set the stage for the city-state to demonstrate its reputation for orderliness and efficiency. Indeed, within hours of Kuala Lumpur's September 1 announcement, Singapore's central bankers were drawing up a game plan to cope with the new rules next door. Its quick, organized response to Malaysia's financial shutdown could solidify its place as Southeast Asia's premier financial centre.

The bankers had to move fast. Bank Negara, Malaysia's central bank, had set a September 4 deadline for unwinding offshore transactions, namely foreign-exchange forward contracts (agreements between two parties to exchange currencies at a set rate and future date) that had been booked through Singapore. After days of working around the clock and consulting more than 30 banks, Singapore's foreign-exchange committee issued guidelines for valuing contracts that would come due in the weeks and months ahead. And it recommended that net settlements be paid in U.S. dollars.

Banks and their clients were free to accept the benchmarks or set their own. "The MAS is trying to be a moderator," says a Singapore-based banking analyst, referring to the Monetary Authority of Singapore, the de facto central bank. "It wants to ensure the integrity of the system and close out as soon as possible. What happens behind the scenes, you have to resolve with your client." Many used the MAS benchmarks--including an exchange rate of 4 ringgit to the dollar (slightly weaker than Malaysia's new set rate of 3.8)--to settle their contracts, bankers say. Meanwhile, Bank Negara extended the settlement deadline twice, most recently to September 12.

Most bankers were breathing more easily after the initial days of chaos, but the ensuing fallout will cast a pall over Singapore. About a third of the staff at any Singaporean brokerage used to focus on Malaysian shares. "Now they are effectively jobless," says the research director of an international brokerage in Singapore. Many banks had at least one or two senior ringgit traders; they will no longer have any currency to trade. Property-consulting firms will let go agents selling Malaysian property.

Since the city-state effectively separated from Malaysia only in 1965, Singaporeans have felt the force of the controls more than others. Family ties and corporate connections still hold fast between the two countries. Singaporeans hold much of the 25 billion ringgit ($7 billion) that Malaysian officials say is outside the country, as well as an unknown amount of ringgit in Malaysian accounts. They are also heavily invested in Malaysian stocks, and young families own swaths of seafront property in Johor, the Malaysian state that borders Singapore.

Suddenly, they face hard choices. Malaysian officials say offshore ringgit will be deemed worthless on September 30. Until then, ringgit held in Singaporean accounts can be easily converted into another currency. Singaporeans with money in Malaysian bank accounts, though, cannot take it out of the country before September 1, 1999--one year from the imposition of controls. Similarly, if they hold Malaysian stocks or property in Malaysia, and sell them now, they cannot take out the proceeds for a year.

Private bankers in Singapore say most depositors are opting to convert their ringgit holdings into dollars at the MAS-set exchange rate. But if the capital controls were meant to repatriate floods of ringgit notes, they probably won't work: Malaysians bringing money home are subject to taxes, and for most offshore depositors, the rates will be "way in excess of 30 percent," a Singapore banker says.

Song Seng Wun, regional economist at G.K. Goh, figures the most Malaysia can expect in repatriations from Singapore is around 2 billion ringgit in notes. "It's certain almost all the non-Malaysian depositors won't want ringgit now," and will convert it into other currencies, he says, "while a fraction of Malaysian depositors may need the ringgit onshore and will send money back."

The Malaysian move hits Singapore in one more critical area: its stockmarket. For years Malaysia has sought Singapore's support to curb the Central Limit Order Book International over-the-counter market, which traded mostly Malaysian securities: Malaysian Prime Minister Mahathir Mohamad wanted Malaysian shares to trade only in Malaysia. Singapore, however, encouraged the market, saying it added liquidity to Malaysian shares.

According to one estimate, Singapore residents hold more than 200,000 Clob accounts, worth $1.1 billion. After Malaysia decreed that trading in Malaysian shares could be done only through the KLSE or other authorized markets, the Stock Exchange of Singapore gave in and closed Clob.

As the settlement deadline loomed, bankers were still trying to clarify Bank Negara's position on a raft of issues, including the way in which Malaysian shares on Clob could be transferred to Malaysian accounts. Also unresolved was how to tackle the many complicated currency-related deals that involve multiple parties both inside and outside Malaysia. Having to unwind positions in a hurry leaves some parties exposed to risk. Says a banker involved in the talks with Bank Negara: "We have to collapse everything at the same time or be left with unbalanced positions we don't want to take."