Malaysia Lowers Interest Rates,
Spurs Speculation of Early Election
By JAMES HOOKWAY
Dow Jones Newswires
KUALA LUMPUR, Malaysia -- Malaysia loosened monetary policy for
the second time in as many weeks, prompting talk that Prime Minister
Mahathir Mohamad may be moving to boost the economy before calling
an early election.
The central bank, the Bank Negara Malaysia, cut the three-month rate at
which it lends to banks to 10%, from 10.5%. The rate had been lowered
from 11% on July 31, in what central bankers described then as a
"cautious easing in monetary policy."
The move should lead to a further fall in the Kuala Lumpur Interbank Offer
Rates, or Klibor, which commercial banks use to calculate their own
lending rates. Lending rates have now fallen to about 11.4%-12% from
14%-16% since the Bank Negara began pumping more liquidity into the
financial system.
Cut Bigger Than Expected
Analysts said the move, which is more aggressive than generally expected,
suggests the government could be moving to ward an election well before
parliament expires in April 2000. "I really suspect there may be a link
between this monetary easing and an early election," said Jimmy Koh, a
regional economist at Independent Economic Analysis Ltd. in Singapore.
The softer policy comes at a time when Dr. Mahathir is stepping up his
forays into the rural heartland of Malaysia. Besides making sure that the
local branches of his ruling United Malays National Organization are up to
speed, he also is buttressing his argument that it isn't the government that's
responsible for the sudden turnaround in the country's economic fortunes,
but the foreign speculators who are hell-bent on recolonizing the nation.
Senior UMNO officials have exhorted party members to be ready for
snap polls. Meanwhile, the chief of Malaysia's election commission said it
won't be able to conduct elections for four or five months. But he didn't
rule out such a move. "The commission is prepared to conduct the polls if
the Prime Minister decides to dissolve parliament earlier," Harun Din said.
Concern About Economy
Commentators offer a variety of dates for a possible snap election, ranging
from October to April. But some said the sooner the better for Dr.
Mahathir. "The government is not certain how the economy will fare in the
next few months. The longer they wait the more difficult it may become,"
said Chandra Muzaffar, a professor of politics at University Malaya.
After posting annual 8%-plus growth for much of the past decade,
Malaysia is only now feeling the full impact of the Asian crisis. The ringgit
has slumped more than 40% against the dollar in the past year, and the
stock market is in tatters.
The government has said the economy could shrink by up to 2% this year,
although private economists fear 5% may be more likely.
To combat those fears, and help the raft of companies now sinking under a
crippling debt burden, the government is pumping 12 billion ringgit ($2.87
billion) into the economy through two fiscal stimulus packages. And the
central bank as well as Finance Minister Anwar Ibrahim have cast aside
their former commitment to high interest rates and a stable ringgit.
Central-Bank Turnabout
In fact, Monday's move is evidence that monetary policy is unwinding
much faster than many observers thought it would. The Bank Negara, they
said, had been working hard to create the impression that it was only
slightly easing its interest rate regime.
But because it was also using other monetary tools, such as reducing the
amount of deposits commercial banks have to keep at the central bank,
the Bank Negara had already pumped a lot of cash into the market --
about 21 billion ringgit.
A foreign banker based in Kuala Lumpur pointed to a potentially
inflationary cycle where excess liquidity forces the central bank to reduce
its own interest rates just so it won't be out of step with the market. But
with a relatively small foreign-debt burden, he said, Malaysia may be able
to get away with its new, softer policy.
The problem for Malaysia is high domestic debt, exceeding 170% of
GDP, and it makes sense for the country's policy makers to tackle this by
loosening policy settings.
Cryptic Explanation
The Bank Negara itself was cryptic in explaining its latest policy move.
"This move is in response to the excess liquidity of a large part of the
banking system," it said.
Some economists suggested that this new-found liquidity could, in part, be
the result of greater willingness among commercial banks to lend to each
other. Two new agencies have been set up recently to address the growing
problems in the banking sector. Danaharta, Malaysia's asset-management
company, will buy nonperforming assets from banks and then work to
rehabilitate them, taking over the management of debtor companies, if
necessary.
The other is Danamodal. This agency, which Bank Negara aims to have
funded by private institutions and multilateral agencies like the World Bank
and the Asian Development Bank, will buy strategic stakes in troubled
banks and force them to merge with each other.
Meanwhile, there may also yet be more trouble for the ringgit because of
the lower lending rates, especially when the rest of the region is worrying
about higher black-market rates for the dollar in China and whether Hong
Kong will manage to keep its dollar peg.
"I would have thought the timing was a little odd, with all the pressures in
the regional currency market," said Goldman Sachs economist Don
Hanna.
He also pointed out that lower interest rates widen the gulf between
onshore rates and offshore ringgit deposit rates, which are as high as 25%
in Singapore. The danger is that this can provoke further capital outflows.
The ringgit weakened to 4.2350 ringgit to the dollar in afternoon Asian
trading from 4.2150 ringgit before the Bank Negara issued its statement.
Succession in the Balance
But in the longer term, analysts said, Malaysia's softer policy regime could
determine the country's political landscape in the future. "If it works," the
foreign banker said, "Anwar will be seen to have been wrong, and
Mahathir will be in power for some time. The succession will be delayed."
Datuk Seri Anwar, as deputy prime minister, is the natural heir to replace
Dr. Mahathir if and when the prime minister decides to step down.
However, the recent debate between the two over the direction of
monetary policy, and the appointment of former finance minister Tun Daim
Zainuddin, a close Mahathir ally, as special economics minister, has set
tongues wagging on how secure Datuk Seri Anwar's position really is.
The latter, though, stresses that there is no conflict in the highest levels of
government, and last week dismissed suggestions that he may be on the
brink of resigning. |
