Mahathir on Singapore 

On Capital controls:

By preventing currency traders from getting hold of your currency, you can stabilize the economy.

We had to look into how to do that. See, most our money was in Singapore. What Singapore did was to offer very high interest rates, siphoning off all the money. Banks had no money to lend. And people were, of course, attracted by the high interest rates or they have a loss of confidence in Malaysian banks and kept their money with branches of foreign banks in Singapore. So then of course the interbank rates went up. All these things created . . .

We heard that at one stage there was MR$32 billion in Singapore and MR$20 billion in Malaysia.

Yes, that was about right. We estimated that there would be about MR$32 billion in Singapore. And that money was obviously being lent to the currency traders so that they can trade it down. And that was damaging our economy more and more. So the question is how do we get this money out of their control? How do we bring back the money? The answer to that of course is to make the money absolutely valueless outside of Malaysia. So we gave them one month. If within one month, they don't bring back the money, we declare that money as no longer legal tender. It will not be allowed to come in. And if they're not allowed to come in, in whatever form it may be--it may be just bank transactions, figures in books and all that, but they can't just transfer it back by computer or whatever--that will force them to bring the money back into the country. Otherwise they will lose and in fact a lot of people lost money. I believe that a lot of currency traders lost money. Once it is back, the question is how do we prevent the money from going out. And we had of course all these regulations and they have been effective. Also the rate of exchange that we had permitted to fall. The temptation of course is to strengthen it to the old level of 2.5 [to the US dollar]. But if we do that we will not be competitive against our neighbours.

What role did the capital controls play in Malaysia's economic recovery? Malaysia is coming out of the worst but the neighbours are also--without capital controls.

Yes, it so happens that when we imposed capital controls the others seem to be recovering also. But there are other factors which also operate on them. One is of course the fear that they might impose capital controls. This is a real fear. The second thing is LTCM. Because of that, banks were not lending money to the hedge funds, not the way they used to lend money. They still lend but not that much. So because of that, the hedge funds focused on other countries, Russia, Brazil and others. For us it was easy because we had no foreign debts. Even the private sector had very little foreign debt.

And also you had a special situation with regard to Singapore.

Well, Singapore also holds a lot of ringgit, a lot of Indonesian rupiah, plus they hold a lot of reserves from other countries. So to bring back that money, we have a problem with Singapore, because Singapore has also got Clob [the over-the-counter exchange on which Malaysian shares were traded in Singapore]. Clob undermined our share prices. They were operating through trustees. So they were registered under one trustee, but there were maybe over a hundred people under one trustee. And they were trading among themselves and affecting the share prices, but the register here doesn't show any change. But the prices change. So we have to stop that. To stop that we decided that we would not allow shareholders to register under the name of trustees. So that stopped Clob. We didn't like Clob right from the beginning. When they started Clob, we told them that this is not right. We're trying to separate the two share markets; they're trying to siphon off our shares. And a lot of trading is done in Singapore.

But a lot of Malaysians were also involved.

Well, there are of course Malaysians. Malaysians, of course, if they see an opportunity to make money, they will. But the majority are not Malaysians. What is bad about Clob is that the nominee companies lend the shares belonging to their shareholders, and they lend the shares to people doing short selling. The shareholders themselves may not do that, but the nominees holding huge numbers of shares were just lending.

So short selling was much easier.

Much easier. So we stopped short selling here very early on, in 1997. But it was not effective because Singapore was doing it. So our route was to close down Clob.

This has of course caused a bit of friction between Singapore and Malaysia.

Well, it is not our creation. We didn't create Clob. It is a creation of the Singapore stockmarket and basically the Singapore government. They have a duty to resolve it. It's not us. The existence of Clob has done us a lot of damage.