KL's Ringgit curbs 'a step backwards'

It was "inevitable" that Malaysia's capital and exchange controls would hit Singapore adversely since their economies are so interdependent.

To a question from East Coast GRC MP Chng Hee Kok, Mr Lee said the regional crisis had already weakened the outlook for foreign investment.

"Uncertainty arising from Malaysia's capital controls may further discourage foreign investors." So Asean will have to work harder to bring investor confidence back, he said.

"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," he added.

Several ministers at the meeting reportedly ruled out implementing capital controls to steady exchange rates.

But such controls, said Mr Lee, may mean that Malaysia recovers more quickly, provided the measures are temporary and Malaysia uses this period of stability to bring about needed reforms.

But the shockwaves will reverberate across Singapore's economy, from its off-the-counter share market, commonly referred to as Clob, to foreign exchange transactions to bilateral trade and investment inflows from across the Causeway.

"The closure of Clob is an immediate consequence," he said. The end of ringgit trading also reduced activity in Singapore's foreign exchange market. But ringgit trades had already declined over the past few months and made up only a small part of total volume just before the measures were introduced.

"There will also be some loss of business for banks and fund managers, as they can no longer accept ringgit deposits or trade in the currency," he added.

Offshore loans to Malaysia through Singapore's Asian Dollar Market -- although they formed a small part of total offshore loans -- could also be hit, he said.

In bilateral trade, firms with substantial contracts in ringgit would have to renegotiate these and their financing arrangements.

This would mean extra administrative costs, since all deals have to be done in foreign currency, and would double foreign exchange costs.

He added: "The ease of getting Bank Negara's authorisation for obtaining foreign exchange for trade and profit repatriation purposes will be critical. Any bureaucratic delay will mean higher business costs."

He noted that about 60 per cent of Singapore's trade with Malaysia is "intra-firm, intra-MNC" and done mainly in US dollars, so this is unlikely to be affected much by the recent measures. Only about 6 per cent of bilateral trade is in ringgit denominations.

Mr Lee said the capital controls would also result in less Malaysian investment in Singapore, but this was only a very small percentage of the Republic's investment inflows.

When asked to quantify the effects, he said it was too early to assess the situation accurately.

Published in the Straits Times. Oct 13, 1998