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Malaysia: Protecting Long Term Money Investment Over Short Term

Before the Asian currency crisis, the Malaysian ringgit (RM) traded at about RM2.5000/$. In the initial crissis, the ringgit depreiciated about to above RM4.000/$. On Sept. 1, 1998, 14 months after the crisis began, the Malaysian government introduced exchange controls intended to reduce the internationalization of the ringgit. These included:

* Requiring govermental approval for ringgit-denominated transactions with nonresidents.
* Requiring short term inflows of capital to remain inthe country for a minimum period of one year. Such fund , could however, be actively managed in terms of ringgit assets.
* Restricting travelers from bringing into the country or taking out of the country more than RM1,000- approximately $26 at the new pegged exchange rate of RM3.8000/$
* Limiting foreign investments abroad of more than RM10,000.
* Limiting Malaysians who are traveling abroad from carrying more than Rm10,000 without prior approval.

The Exchange rat control did not :
* Limit the repatriation of profits, dividends, interest, fees, comissions and rental incomemfrom portfolio investments.
* Limit direct investment inlows and outflows.

The essence of these controls was to restrict the inflow of short term portfolio flows, sometimes caledd " hot money," while continuing to attract long term foreign direct investment. At the time the controls were imposed, the international investment commutity generally reacted with dismay and predicted that the ringgit would soon fall to Rm8.00 or Rm10.00 per dollar.

Do you think it is possible to block short term portfolio money flows while still making a country attractive to long term direct investors? Explain. Be sure to include a disscussion of Malaysia in your response.

Solution Preview

The objective of the case is to present the efforts of the Malaysian government to block short term portfolio money outflows while it attempts to make the country attractive to long term direct investors. There has been an Asian 'crises' and this has depressed the RM. The government wants to prevent further fall in the currency rate. You are required to evaluate the decisions of the government in light of their stated objectives.
<br>The case makes several assumptions, which need to be considered. First, there is the prediction of the international investment community that the restrictions will lead to a further fall in the value of the RM; there is no evidence to support it. In fact if the government is able to restrict the outflow of short-term cash and encourage long-term investments, there will be an improvement in the position of the RM. Second, the case omits mentioning the effect the restrictions on short term will have on long-term inflows. It presupposes that restrictions on the short-term outflows will not have any effect on the long-term investments. This is not true, by restricting the short term investments and repatriations, the liquidity of new investments in Malaysia falls and this makes it a less attractive ...