Changes in Malaysia: Capital Controls, Prime Ministers and Political Connections
Heather Mitchell - RMIT University
Saramma Joseph - Metropolitan College, Malaysia
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On 1st September 1998 Malaysia introduced capital controls
• On 2nd September Anwar Ibrahim was arrested
• He was an outspoken opponent of capital controls
• Other countries had been hit earlier by crisis
• Thailand in late 1996-1997
• South Korea and Indonesia 1997
• These countries reduced restrictions on the flow of capital to facilitate IMF loans
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What were these controls?
• Fixed exchange rate of 3.8 ringgit to US dollar
• Ringgit no longer legal tender outside Malaysia
• Offshore trading in Malaysian shares was banned
• Repatriation of foreign owned investments banned for one year
• All trade settlement had to be make in foreign currency
• All ringgit assets held abroad had to be repatriated
• and the list goes on ……
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Capital Controls: Good or Bad?
• Definitely no agreement!
• Krugman (1998) capital controls should be used even at the risk of increasing corruption
• IMF, Sinclair Davidson – capital controls bad
• Were they effective – still no agreement
• Rodrik and Kaplan (2001) – Malaysia did better than other SE Asian countries
• Dornbush (2000) found the evidence unclear
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General Agreement
• Capital controls allow politicians to protect or favour their mates “cronies”
• Did this happen in Malaysia?
• Evidence strongly suggests it did
• Johnson & Mitton (2003) – compared firms allied with Mahathir to those allied with Anwar
• Firms with a crony connection to Mahathir increased in value by $5 billion in September 2008
• 32% of that gain can be attributed to their connection to Mahathir
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Our Questions
• Have politically favoured firms continued to benefit from the controls?
• Have they suffered as controls have been reduced?
• Do we find similar effects for firms with government investment or control?
• Have these effects been impacted by the change of prime ministership from Mahathir to Badawi?
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Major Events
• Restructuring period 1/10/1998 to 30/9/2000 (J&M)
• Repatriation restrictions lessened
• Forced mergers of firms in finance industry
• Crony financial firms should do well but other crony firms will lose their advantages
• Consolidation period 1/10/2000 to 21/6/2002
• Final repatriation restrictions removed
• No substantial differences in firms performance
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Major Events
• Transition period – 22/6/2002 to 30/10/2003
• Mahathir’s shock resignation, followed by a planned handover to Badawi
• All firms will be adversely affected, especially those with Mahathir connection, but those with Anwar, not as badly
• Resolution period – 31/10/2003 to 21/7/2005
• Last of controls, including currency peg, removed
• Anticorruption measures introduced
• Crony firms should do worse, especially financials
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Major Events
• Final Period – 22/7/2005 to 30/6/2006
• Nothing much going on.
• Included for comparison purposes
• Mahathir seems to have lost influence
• No difference between crony firms and others
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Classification of firms
• Crony firms – personal relationships with politicians – based on listing in J&M
• Government linked companies (GLC) – commercial objective, but government holds a direct controlling stake
• Khazanah firms – government holds an investment through its investment arm Khazanah Nasional Berhad
• Government can openly favour 2nd two and connection is stable
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Data
• Monthly returns data on 625 firms listed on KLSE main board
• Both returns and accounting data sourced from Datastream
• Firm specific control variables of size, industry type and leverage used instead of risk adjusted returns
• Beta values have been found to be highly variable during this period
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Preliminary findings
• Raw data – table 1
• Connected firms of all three types are substantially larger than those without that connection
• Significant differences exist between most of the other performance measures considered
• Controlling for size and profitability – table 2
• Khazanhah firms are different, but cronies and GLCs are not different from other groups
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Model
• RET – return during period
• JM, GLC & KNB – dummy variables for connected firms, also single variable for all connection types
• TA & LEV – controls for size and debt ratio
• ID – industry dummy variables
• Financial firms analysed separately
iiii KNBGLCJMRET 3210
81
,554 )ln(toj
iijjii eIDLEVTA
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Results
Period Expectation (Connections) Finding
Restriction Financials up – others down Nothing
Consolidation Nothing Financials – GLCs worse
Others – only KNB better
Resignation All firms down
Anwar firms less badly effected
Other cronies worse
First month only – all firms down
GLCs worse
Anwar financials better?
Whole period – GLCs worse (only effect)
Transition Crony firms worse Crony financial firms worse
Final Nothing Nothing
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Conclusions
• Some evidence that crony firms suffered through withdrawal on capital controls – but only those in finance industry
• Weak evidence that “Anwar” finance firms were less concerned with Mahathir’s resignation
• Government controlled firms often underperformed
• Political connection no longer seems to have market value
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The End
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