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NEWS UPDATES Asean Affairs        11  April 2011

Malaysia considers capital inflow controls

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Although the threat of capital inflows in Malaysia like hot money is much lower compared with other Asian countries, economists and other industry observers feel certain measures need to be considered.

These include selective capital controls, specific taxes and stamp duties, encouraging more capital outflows and macro-prudential measures to prevent overheating of certain assets.

Malaysia Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said the inflows had been largely dominated by the portfolio capital which amounted to RM44.9bil in 2010, up from minus RM1.7bil in the preceding year.

“The inflows have been induced by better growth prospects of the economy relative to advanced economies, as well as fewer macro imbalances such as budget deficits and government debt,” he said.

“To control the inflows of short-term capital, some countries have implemented selective measures which can be classified as quasi' or selective capital control.

“These measures include managing external private-sector borrowing and imposing limits on banks' foreign-exchange exposure in carry trade and on foreign-exchange derivatives,” he said. Portfolio capital or investments involve the purchase of stocks, bonds and money market instruments by foreigners for the purpose of realising financial returns.

Zahidi said other measures that could be used to control short-term capital included higher stamp duties to manage overheating in asset markets (as was done in Singapore), financing through higher down-payments, higher rates on second homes, and restricting third mortgages .

He said the other moves could be by encouraging more capital outflows by raising limits on direct investments abroad and reducing requirements for repatriating export receipts.

MIDF Research chief economist Anthony Dass said to contain the inflow of hot money, Bank Negara besides imposing selective capital controls could also further raise the statutory reserve requirement (SRR) to mop up excess liquidity in the financial system as well as introduce the Vostro Account which was adopted in the early 1990s to control inflow of hot money.

Vostro Account is a local currency account maintained with a bank by another bank. The term is normally applied to the counter-party's account from which funds may be paid into or withdrawn as a result of a transaction.

In contrast to countries like China, South Korea and Thailand, group chief economist at RAM Holdings Bhd Dr Yeah Kim Leng said the threat of capital inflows to Malaysia was much lower.

He said this was due to the comparatively large absorptive capacity of the banking system and capital markets relative to the size of the current inflows, steady net capital flows since the late 1990s, and greater allowance for currency appreciation and sterilisation by Bank Negara.

There was still considerable flexibility for currency appreciation and other measures such as fiscal consolidation before the Government resorted to more drastic measures to curb the threat of hot money, he noted.

Yeah said the standard policy tools that could be used to control inflows included reserve accumulation and exchange rate appreciation provided the latter did not derail the export sector due to too rapid loss in international competitiveness.

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