Deeper Money Markets Have Cut Risk Of Another Asian Financial Crisis Says Dr M

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Dr Mahathir Mohamad said that when there are many people competing in currency trading, ‘then it’s a bit difficult to play around with the value’.KUALA LUMPUR: The depth of modern currency markets means a repeat of the 1997 Asian financial crisis is less likely, according to one of the political leaders who had to deal with its fallout.
Former prime minister Dr Mahathir Mohamad said a proliferation of currency-trading hedge funds and other players has made it harder to stage the speculative attacks of the kind he blames for triggering mayhem 25 years ago.
“When there are many people competing in currency trading, then it’s a bit difficult to play around with the value,” he said in an interview with Nikkei Asia to mark the anniversary of the crisis.
“You may want to depress the value but other people want to raise the value, so they cancel each other (out).”

The start of the financial crisis that engulfed nations from Malaysia to South Korea to Indonesia is usually pegged to July 2, 1997, when Thailand’s attempts to protect the value of its currency were overwhelmed by capital flows out of the country. The sharp devaluation of the baht led to pressure on other currencies and, within two weeks, to the collapse of the ringgit’s peg to the US dollar.
Currency markets have ballooned in the quarter-century since the crisis. Foreign exchange trading averaged US$6.6 trillion a day in 2019, according to the Bank for International Settlements’ latest triennial survey, more than five times the levels in the mid-90s.
Mahathir, who served as the country’s fourth leader from 1981 to 2003, said currency traders remain a powerful force and that “attacking and zeroing in on a specific currency” continues.
He cited developed economies like the UK and Italy that had devalued currencies after attacks by currency traders in the intervening years.
But he said, lessons had been learned from the crisis, notably that a government needed to fully understand trading in its currency and build strong foreign exchange reserves to allow them to step in when necessary.
Malaysia was one of the main casualties of the 1997 crisis. The value of the ringgit fell by half, making it much more difficult for businesses to service debt they had borrowed in hard currency. The stock market index crashed more than 75%, and foreign capital exited the country.
Initially, Malaysia took advice from the International Monetary Fund, slashing government spending and raising interest rates in a bid to lure back foreign investors.
However, not long after, in a controversial approach that marked Malaysia out from other countries, Mahathir rejected the IMF’s recommendations and instead increased government spending to boost the economy.
At the same time, he introduced stringent capital controls and once again pegged the currency to the dollar.
The fixed exchange system was only removed in 2005 and, even then, was replaced by a managed float system instead of allowing the ringgit to float freely.
“If you go to the IMF and the World Bank, their only interest is (that you) repay the loans. They don’t care what happens to the country, politically or economically,” said Mahathir, who turns 97 this month.
“They also want to take over the running of the country and the economic policy of the country, which means we have to surrender to them.”
Mahathir’s defiance of the IMF was also the trigger for a long conflict between him and his former deputy turned opposition leader, Anwar Ibrahim. Anwar, who served in the Cabinet during that time, was seen as an advocate for Western solution providers.
Mahathir told Nikkei Asia that Sri Lanka’s present debt crisis is a warning to other Asian governments that they must pursue responsible fiscal policies or risk falling into the hands of an unforgiving IMF.
Sri Lanka has run out of foreign exchange reserves with which to pay for imports, triggering food and fuel shortages along with political turmoil. The country has stopped paying its foreign debt and started talks for an IMF loan.
Sri Lanka’s major problem was that it had very little hard currency reserves to use to pay its creditors, Mahathir said.
“It is purely poor management of the currency and poor investment policy,” he said. Everyone is threatened with the possibility of going down the road of Sri Lanka. It is a lesson for all.”
While Asia’s pre-eminent economy, China, has enough resources to ward off a financial crisis, Mahathir said the region’s developing economies need to remain vigilant – and need to stand ready to impose the kind of capital controls that he employed to get Malaysia out of its crisis a quarter-century ago.
“Currency traders can’t really play around (with) China, but the other developing countries which want to take part in the currency market have to be careful,” he said.
His remarks come at a time when the US dollar is at its strongest in 20 years and currencies across Asia and beyond have depreciated sharply, stoking inflation and increasing the burden of debt denominated in dollars.
“There is some benefit to be derived (from) the movement of the value of the currency, but it should not be too extreme,” he said, adding that a fluctuation within 5% up or down “is acceptable because it creates movement of money, and movement of goods and money creates wealth”.
“Devalue the currency by 50% and people become poor,” he said. “You can’t allow that.” - FMT

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