Tuesday 28 July 2015

Capital Control: RM 4

First of all, let us see what is capital control.

Capital control as defined by wikipedia is as follow:

Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measures may be economy-wide, sector-specific (usually the financial sector), or industry specific (for example, “strategic” industries). They may apply to all flows, or may differentiate by type or duration of the flow (debt, equity, direct investment; short-term vs. medium- and long-term).
Types of capital control include exchange controls that prevent or limit the buying and selling of a national currency at the market rate, caps on the allowed volume for the international sale or purchase of various financial assets, transaction taxes such as the proposed Tobin tax, minimum stay requirements, requirements for mandatory approval, or even limits on the amount of money a prilvate citizen is allowed to remove from the country. There have been several shifts of opinion on whether capital controls are beneficial and in what circumstances they should be used.
Capital controls were an integral part of the Bretton Woods system which emerged after World War II and lasted until the early 1970s. This period was the first time capital controls had been endorsed by mainstream economics. In the 1970s free market economists became increasingly successful in persuading their colleagues that capital controls were in the main harmful. The US, other western governments, and the big multilateral financial institutions (the International Monetary Fund (IMF) and World Bank) began to take an increasingly critical view of capital controls and persuaded many countries to abandon them to facilitate financial globalization.[1]
The Latin American debt crisis of the early 1980s, the East Asian financial crisis of the late 1990s, the Russian ruble crisis of 1998-99, and the global financial crisis of 2008, however, highlighted the risks associated with the volatility of capital flows, and led many countries—even those with relatively open capital accounts—to make use of capital controls alongside macroeconomic and prudential policies as means to damp the effects of volatile flows on their economies.
In the aftermath of the global financial crisis, as capital inflows surged to emerging market economies, a group of economists at the IMF outlined the elements of a policy toolkit to manage the macroeconomic and financial-stability risks associated with capital flow volatility. The proposed toolkit allowed a role for capital controls.[2] The study, as well as a successor study focusing on financial-stability concerns stemming from capital flow volatility,[3] while not representing an IMF official view, were nevertheless influential in generating debate among policy makers and the international community, and ultimately in bringing about a shift in the institutional position of the IMF.[4][5][6] With the increased use of capital controls in recent years, the IMF has moved to destigmatize the use of capital controls alongside macroeconomic and prudential policies to deal with capital flow volatility. More widespread use of capital controls, however, raises a host of multilateral coordination issues, as enunciated for example by the G-20, echoing the concerns voiced by John Maynard Keynes and Harry Dexter White more than six decades ago.

So, what's the advantage of capital control:

a) avoid excessive flight of capital
b) maintain investor confident.
c) encourage foreign investor to invest
d) allow business to project and planned their next course of action
e) sustain the economy of a country.

Here's why Malaysia had to do capital control at RM 4.

a) excessive flight of foreign capital especially USD.
b) BNM foreign reserve is depleting excessively
c) import is getting expensive
d) business is unable to service their loan
e) Investor and business confident gone as they cannot bear the depreciating ringgit.

Advantage of capital control to investor:

a) High Foreign debt company will prosper - AAX, Lion Ind.
b) Export oriented (buy in MYR, sell in USD) - wood, furniture, tech, textiles (sustained)
c) Import oriented (buy in USD, sell in MYR) - eggs, flour, cars (improved margin)

Disadvantage

a) Initial flight of capital
b) Distrust of foreign investor.

Malaysia was the first country to come out from the ASEAN financial crisis due to capital control in 1998 see www.jomoks.org/research/pdf/MY_K_controls

Disclaimer: This is a personal weblog, reflecting my personal views and not the views of anyone or any organization, which I may be affiliated to. All information provided here, including recommendations (if any), should be treated for informational purposes only. The author should not be held liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

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