Klang MP Charles Santiago has urged the government to immediately implement capital controls to regulate of the influx of ‘hot money’, in order to protect the economy.

Hot money or speculative capital has a way of creating asset bubbles in the currency, stock market and property market, in turn leading to higher inflation.

charles santiago Santiago said capital controls should be viewed as a “policy response” to regulate speculative capital and protect the domestic economy from volatile capital flows.

The DAP parliamentarian was responding to comments by Second Finance Minister Ahmad Husni Hanadzlah in a Bloomberg interview last week that the government does not have capital controls in mind at the moment.

Ahmad Husni was of the view that the country is benefiting from capital inflow and argued that the appreciation of the ringgit has not affected the property market.

Santiago cited a recent Bank Negara statement that indicated the need for greater caution.

Ba zeti akhtar nk Negara Governor Zeti Akhtar Aziz had noted that large and volatile capital flows into regional economies could pose risks to macroeconomic policies and financial stability.

Malaysia is in a position to control the flows and had also gained experience from the 1997 Asian financial crisis, she said.

As such, the government is not considering any kind of restrictive measures. Should the need arise, Bank Negara will act with other central banks in the region.

However, Santiago argued that the government’s hesitation in adopting capital controls could be due to a “perception and fear” that it will further damage the country’s economic standing and competitiveness in the eyes of investors.

“Instead of fearing negative perceptions from investors, the government should be encouraged to view capital controls as a protective policy to insulate the local economy from destabilisation,” he said.

“This phenomenon was recently adopted by developing countries such as China, Indonesia, Thailand, Brazil, South Korea (among others).”

Government not interested

Santiago, an economist by training, said exporters will be affected by the appreciation of the ringgit, leading to a loss of competitiveness and job losses in the export sector.

“The ringgit appreciation could lead to a further decline in exports. With interest rates near-zero in developed economies such as US and Japan, investors will move money into emerging markets in search of higher returns,” he said.

He said it is understandable why the government would want to avoid capital controls. The higher the stock market goes, the greater the perception that the economy is doing well.

“It will make people think that the Economic Transformation Programme, Government Transformation Plans and others mechanisms are all working.”

In an im donald lim mediate response, Deputy Finance Minister Donald Lim, insisted that the government is “quite happy” that Bank Negara is working closely with other Asian central banks.

“They are working together, and are monitoring all the hot money coming into the countries. We can’t really (impose) a law. We know that, in this open economy, we have to expect money to come in,” said Lim.

“We have the experience (of managing a) financial crisis. In the last financial crisis in 2008, I think most of Asia’s central banks handled (it) quite well. I believe at this juncture we are in good hands and do not think such suggestions (for capital controls) are necessary.”

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