A Doctor in The House: A Memoir of Tun Dr Mahathir Mohamad (104 page)

On 17 June 1997, just before the attack on regional currencies began, IMF Managing Director Michel Camdessus praised the Governor of Bank Negara for a well-managed economy and financial regime at the Los Angeles World Affairs Council. “Malaysia is a good example of a country where the authorities are well aware of the challenges of managing the pressures that result from high growth and of maintaining a sound financial system amidst substantial capital flows and a booming property market,” he said. Inflation, he had noted, was low and the ringgit had remained at RM2.5 to USD1 for a long time; it was truly a strong currency, reflecting the sound finances of the country. But now the same people were saying the economy was overheated and, as a result, the ringgit was reeling under the onslaught of the currency traders. I refused to believe that the depreciation of the ringgit was due to a weak economy or to any loss of market confidence in Malaysia.

I bought books on currency trading to better understand its mechanisms because I believed it was currency trading, not the basic condition of our economy itself or our currency which was affecting the ringgit. I had met Camdessus earlier and he seemed like a nice man. As Minister of Finance and Deputy Prime Minister, Anwar met the IMF head quite often. I asked Anwar to appeal to Camdessus to stop currency trading and argued that it was unnecessary and damaging to the economy of developing countries. I do not know whether Anwar stated my case to Camdessus, but no attempt was made to stop currency trading.

To me, trading in currencies as if they were commodities was absurd. Coffee, sugar, rubber and the like are real commodities and they have all kinds of substantive human uses. But currency is different. It has no value in itself, only in exchange as a way of procuring real commodities. It cannot be used in any other way and cannot be directly consumed. We are no longer in the Middle Ages, when the European economy did not have any credible currency and traders in the French markets used Southeast Asian pepper as their money and medium of exchange. Now we use pepper and spices to make our food tasty and we have money to buy the commodities we need.

I remember reading that once, when there was a glut in the coffee market and coffee prices were very low, the Brazilians dumped their coffee beans into the sea to create a shortage and raise the price. But can you dump or burn money in the same way to raise its value? In the case of currency, the situation is actually worse, for there is more money in circulation than there is issued by central banks and currency boards. It is no longer just real money that changes hands during transactions as there are also cheques, credit cards and electronic transfers. The total amount they represent must exceed the total value of currency notes issued and in circulation. Money has, in effect, become virtual.

Looking back now, I suppose I literally took to heart the economists’ cliché that money is the lifeblood of the financial and economic system. As a doctor I understood that there is a finite amount of blood circulating in a person’s body at any time (although you sometimes have to increase it with a transfusion). But I have learned not to take that medical idea or metaphor literally when it is applied to the economy. Money is different from debt, as there can be far more debt around than the money in circulation to support and denominate it. Economists think differently from doctors. For them, two plus two can sometimes be more than four.

After the US emerged from World War II as the dominant military and economic power, the world accepted the US dollar as the standard currency in international trade and as its reserve currency. The Bretton Woods Agreement
[1]
 had fixed the US dollar at 35 to one ounce of gold. All other countries then fixed their currencies against the US dollar, which in effect meant the value of gold. The post-war world economy recovered while this regime was in place, but when the US went off the gold standard in 1971, largely to pay for the accumulating costs of the Vietnam War, the world’s currencies were destabilised. Market forces would now determine the rates and most currencies would “float” in relation to one another.
 

I felt that this destroyed the sovereignty of countries and left them at the mercy of the market and human greed. Greedy people will not take the welfare of others into account; they will certainly not be sensitive to the needs of developing countries. For profit, they will destroy whole countries and impoverish their people.

However, we had to accept the situation despite knowing that market mechanisms and forces could be manipulated. It did not take long for speculators to begin abusing the system. They had invented the short selling of commodities and shares; now, they invented the short selling of currencies.

They made fortunes by bankrupting countries, especially those in the developing world; these were quite literally financial killings. Enterprising people set up hedge funds and invited the rich to subscribe to them. The returns on investments would be far greater than through other channels, but the operations of these funds produced nothing that could be used in the market or for people.

The least that could have been done was to regulate them, but while their promoters kept insisting on transparency in every deal or transaction and in everyone else’s plans—for how could serious investors possibly risk their money on anything that was shrouded in secrecy?—the operations of the funds themselves were allowed to remain mysterious. Who the traders were, where they got their money, how much they borrowed, to whom they sold and who bought the currencies that they sold: we did not know the answers to any of these questions. The funds could leverage their capital by as much as 20 times. With them, more than anywhere else in the economy, credit expansion outstripped the supply of money and ceased to have any coherent relation to it. The effect of their operations was devastating.

Camdessus was French and, I heard, a friend of President Chirac’s. Since I knew Chirac well, I wrote to him about the depredations of the currency traders and asked him to intercede with Camdessus to stop the trading. Again, during the Commonwealth Heads of Government Meeting in Edinburgh, Scotland, in 1997, I met Tony Blair, who had only just become Prime Minister of Britain. I explained the effect of currency trading to him at length and asked him to take it up with the IMF, but my efforts came to nothing.

Malaysia had some prior experience in currency trading, in which we had become involved because we needed to ensure that our reserves would not be depleted because of the fluctuations in the currencies we kept. But we only dealt in the currencies of developed countries. We speculated as all in the market did, but we did not manipulate. It was a matter of taking calculated risks, and when one of our speculative ventures failed, we lost a lot of money. After that lesson, we got out of the business.

In September 1997, I was invited to speak at the annual meeting of the World Bank and the IMF in Hong Kong and took the opportunity to blast currency traders, accusing them of further impoverishing the world’s poor countries. I mentioned Soros by name as one of the traders who had manipulated the currencies of Southeast Asian countries and undermined their development. The next day, Anwar spoke at the same meeting. I had left for Sabah and he rang me there. He sounded annoyed and informed me that my speech had caused the ringgit to depreciate further. He stopped short of telling me not to speak like that again, but I continued with my criticism of the IMF and the currency traders. At a later meeting in Santiago in Chile, I again condemned them and once again, the ringgit fell in value. That seemed proof to me that the currency traders were pushing the devaluation. It could not have been the market, as the reaction was instantaneous. This was not a general consensus from the market but a few key hidden players who were calling the shots. And for their own reasons—some people were deliberately trying to shut my mouth about currency traders.

At home Anwar started what became known as “the IMF solution without the IMF”. But fundamentally, we were not in economic trouble. We had no need to borrow from the IMF to settle foreign debts because we had not borrowed much and few of our debts were due. Those that did fall due, we could still manage to pay. But regardless of whether we needed to borrow from the IMF, Anwar felt that Malaysia had to accept its advice. He believed that to maintain international confidence in our economic management, we should do as we were told and manage our economy the way they wanted. Anwar seemed to think that the IMF medicine was good for us and would help us recover from the international malaise, even if we had not yet fallen ill. So he raised interest rates and cut back on government spending. I warned Anwar that his actions might well deprive the Government of the revenue it needed to pay the salaries of our government servants. He also tried reducing the payment default period from six months to three months before declaring loans as non-performing. This landed the banks with a high percentage of non-performing loans, while making bankrupts of the borrowers. Business slowed down. The disease had arrived. The IMF medicine was not the cure but its cause. Still, Anwar pressed ahead.

The economy was now clearly heading towards a recession. Companies were going bankrupt and were defaulting on their bank loans, especially after Anwar’s decision to reduce the default period and increase interest rates to 12 per cent. We decided to set up an operations agency along the lines of the National Operations Council which dealt with the aftermath of the race riots in 1969. We wanted to minimise political contentions so we brought in all the State Chief Ministers and 
Menteri Besar
, including from PAS, into what we called the National Economic Action Council (NEAC).
[2]
 Trade union and business leaders and think-tank heads were also included.
 

We were able to explain the problems faced by the country to them and heard their views on how to handle the situation. But because of its large size, the Council could not meet often. I decided to have a small advisory panel to follow developments and to suggest remedies. It had to be backed by the Cabinet as a whole, though only a few Cabinet members would be in it. Fortunately, the Cabinet did not question the authority or the arrangements for setting up such a powerful body. Its members included Anwar; Datuk Mustapa Mohamed, a well-credentialled economist who now serves as Malaysia’s Minister of International Trade and Industry; Tun Daim Zainuddin; the Chief Secretary Tan Sri Samsudin Osman; the Secretary-General to the Ministry of Finance Tan Sri Samsuddin Hitam; the Deputy Governor of Bank Negara Datuk Fong Weng Phak (for some reason the Governor never attended our meetings); Tan Sri Ali Abul Hassan Sulaiman who had headed the Economic Planning Unit; Oh Siew Nam, a man from the private sector who was familiar with banking and the financial markets; and ISIS chief Tan Sri Dr Noordin Sopiee.

This small committee met for at least three hours every morning in my office. We scrutinised all the statistics on the economy, commissioned studies of anything that we considered might influence the economic performance or prospects of the country, brought in experts to explain developments and give their views, listened to numerous briefings, and often decided on action that needed to be taken. Fortunately, we did not experience social unrest during this critical period. Malaysians could take a beating but a violent destructive response was not their way. We were also making final preparations for the Commonwealth Games to be held the following year, and we could not afford instability of any kind.

While managing the crisis, I continued to travel abroad to pursue both economic and diplomatic initiatives. I was in Buenos Aires in Argentina when I suddenly remembered Tan Sri Nor Mohamed Yakcop, who had headed the ill-fated Bank Negara currency trading operation. I had spotted him walking down a street in Kuala Lumpur before I had left for Buenos Aires. That image now came to mind and I decided that he might be able to explain currency trading and possibly suggest ways of countering it. Our loss-making venture into currency trading might yet yield Malaysia a valuable, even life-saving dividend as the currency traders now closed in on us. The matter was urgent and I could not wait to come home, so I asked my office to locate Nor Mohamed and fly him to Argentina. Soon after, in the hotel in Buenos Aires, we sat down together and he explained the intricacies of currency trading and why we had lost money. I asked him what lessons from that earlier experience could be applied to our present situation.

He suggested that we get some of our institutions with financial resources to set up a special fund to buy the ringgit. This we did, but again, we were no match for the funds the currency traders had at their disposal. They could leverage 20 times their capital and we would have exhausted our reserves trying to fight them this way. We were up against not one but several funds which were involved in currency trading so, inevitably, the exercise failed. Yet I found Nor Mohamed knowledgeable and decided to appoint him my financial adviser and a member of the NEAC.

We directed many questions to him in our efforts to grasp and to curb currency trading. I had to fully understand the banking and the financial systems and Nor Mohamed was able to explain it all. Not understanding these intricacies had made us institute measures which proved ineffective. At one stage I had thought of deliberately devaluing our ringgit and increasing salaries and wages to neutralise the effect of devaluation. When I took this idea to some of my colleagues and Ministers, they were adamant that it would not work. Yet I believed there had to be something the Government could legally do to stop the trade in our currency. I was still under the impression that actual money changed hands during all these transactions. I had not yet grasped the abstract and virtual nature of money, and how paper transactions in billions may flow across the world faster than you can pay for RM10 worth of vegetables at the local night market.

That was why when we were told that money was being taken out of the country, we thought people were actually taking cash out with them as they left. We asked the Customs officials at exit points to check travellers’ bags but were mystified because no cash was being taken out of the country. Yet the amount of money in Malaysia was now considerably less than before, and we learnt that money had flowed to Singapore by the millions. That was why we asked the Singapore Government to deposit some of their ringgit in Malaysian banks. We were also puzzled as to how currency traders who operated outside Malaysia could have billions of ringgit to sell. Where, I wondered, did these international predators get their ringgit? They were short selling the ringgit and entering into contracts to deliver ringgit they appeared not to have. Still, they had to deliver some time.