"Kuala Lumpur, April 30-
Any attempt by Malaysia to impose capital controls to stem the current inflow of hot capital will be viewed negatively by the market, say analysts and economists.
Their warning came after the possibility of hot money pouring into the country as a fiscal crisis grips several Western countries including Greece which is unable to resolve its problems, even with European Union and International Monetary Fund support.
In the last few days, Greece Spain and Portugal have all been downgraded by Standard & Poor’s, the credit ratings agency.
Maybank Investment’s Suhaimi Ilias said any capital controls would be “counter-productive” although governments and central banks in the region want a more balanced flow of capital between short-and long-term investments.
“I would be surprised if there was any form of capital controls emerging,” he told The Malaysian Insider.
“There’s a concern about hot money essentially and how to manage this to make sure that our economy, while growing, won’t create inflation risk.”
He said the main concern was most likely due to the glut of “cheap money” externally due to the low interest rates in more developed economies like the US.
Suhaimi also identified the anticipated yuan exchange policy change as a reason for increased proxy investments in regional assets.
“There might [also] be some outflow from Thailand looking for more defensive markets. I think Malaysia is benefitting from that.”
However, he warned that capital controls would make Malaysian assets less attractive to foreign investors.
“In an environment where it’s already very competitive to get capital, to adopt such a policy, as far as investment is concerned, [represents] a negative aspect.”
Suhaimi added that there were better options available to achieve “sustained rather than punctuated” capital inflows, citing market-based instruments.
“When you apply market-based instruments it can also contribute to the development of the financial market. There are a lot of benefits that come with it.”
He said the ringgit position as the best regional performing currency has not been seen for a long time, and cited this as an example of “letting the market do its work”.
Another economist, who did not want to be named, said he believed most Asian governments would not introduce strict capital controls.
“Based on our past experience from the Asian financial crisis, we know that capital controls... can be viewed as negative even in the long run,” he said.
“My personal view is that the problem is very similar to the early ‘90s where we saw a huge influx of hot money flowing into the emerging economies.
“I guess the risk [is that] the major industrialised countries will start to increase their interest rate… and then we’ll see outflow.”
While he viewed the recommendations issued by Standard Chartered on Monday to “adopt greater currency flexibility and broaden and deepen capital markets” positively, he said such changes could not take place overnight.
The report said that many emerging market economies, having recovered faster than the West, are on the receiving end of a surge in capital and liquidity that include bank lending, direct and portfolio investment and hot money.
“It takes time to develop... One cannot just transform the economy and the capital market in such a short span of time.”
Economist Zainal Aznam Yusof downplayed the issue of capital inflows and said it was “a manageable kind of situation”.
He explained that such movement of capital always happens when there are signs of recovery.
“We should not be excessively worried about that... We have to allow the exchange rate in Malaysia to react.”
He added that he expected the exchange rate to strengthen some more.
“The question is by how much.”
Zainal said instability in Thailand was probably a minor source of hot capital flowing into the country, reasoning that investors were already familiar with the country’s political landscape.
“The Thailand [political situation] has been persisting for a long time so we shouldn’t exaggerate the Thai factor.”
Lee Heng Guie, of CIMB Investment Bank, said that while it was a challenge for Asia to deal with the flood of cheap liquidity into the region, he believed that Malaysia was not experiencing such an influx.
“I don’t think we see this surging of this hot money into Malaysia at the moment.”
He added that Malaysia had a diversified asset class to absorb the current level of capital inflows, which were not big enough to warrant controls.
However, Lee warned that countries that are unable to stem the tide of short-term capital flows may experience some instability when the flow reverses.
“The IMF even suggested that some countries may think of selective capital controls to deal with these inflows of hot money.”
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