So far so good for exchange controls in Malaysia

Those who have invested or committed to invest in Malaysia's petrochemical industry say that new foreign exchange controls have not affected them because they are still allowed to import, export, and repatriate profit. But the new measures may not ap­peal to potential investors.

Prime Minister Mahathir Mohamad an­nounced the implementation of exchange controls on Sept. 1, a few days after sack­ing Deputy Prime Minister Anwar Ibrahim. Mahathir had become frustrated with do­mestic economic measures patterned after International Monetary Fund remedies, which had failed to save Malaysia from the Asian crisis.

A statement issued by the country's central bank, Bank Negara, on Sept. 1 said that Malaysia wanted to insulate itself from global financial markets to prevent further deterioration of its economy. Since then, the Malaysian currency, the ringgit, is no longer freely tradable, and its value has been fixed at 3.80 per U.S. dollar. But transactions in foreign currency are permitted.

In the weeks since Malaysia adopted the controls, calm has returned to its finan­cial markets, and interest rates have come down. Asian countries have noticed that China does not let its currency float and that it has so far been less affected by the regional crisis. If Malaysia's new policies— against all odds—improve the country's economic performance in the medium term, other countries no doubt will adopt similar measures.

In the first few days following the an­nouncement, there was some confusion as to the meaning of the rules and how they would be interpreted, a BASF spokesman says. Bank Negara rapidly provided clarifica­tions, and BASF concluded that it would be little affected by the changes. Noting that speculators are the main target of the new rules, BASF says: "We are not in the finance business. We do not speculate. We do not talk about stocks and hedging. We are in the real business world; we are producing and selling. You can [still] import raw mate­rials, you can pay in hard currency, you can sell in hard currencies."

Besides, companies can take their profits out of Malaysia. "The regulations themselves do not stop import-export business, nor do they stop you from repatriatingyour profits and dividends, your investment. So the im­pact is not significant," the spokesman says.

Similarly, a Tokyo-based Mitsubishi Corp. official insists the new measures do not affect Aromatics Malaysia, a joint ven­ture with state-owned Petroliam Nasional (Petronas) that will have annual capacity of 420,000 metric tons of /^-xylene and 150,000 metric tons of benzene when it comes onstream early in the next decade. He says construction will begin soon.

Union Carbide, in a joint venture with Petronas, has begun construction of an olefin complex, which is due to come on­stream in 2001 and is centered on an ethane/propane-fed ethylene cracker with capacity of 600,000 metric tons per year. The project is progressing as scheduled, says Marie Berggren, director of the Singa­pore office of petrochemical consulting firm Chemical Market Associates Inc.

Malaysia has been an attractive loca­tion for international petrochemical com­panies. Its labor force is well educated, Petronas is professionally managed, and there is ample supply of oil and gas. Ma­laysia retains these attractions despite the controls.

"If you are a petrochemical producer and you have access to the offtake, and

the majority of product, and you can ac­quire that in dollars or some other curren­cy, you will not worry so much about what happens in Malaysia," Berggren ob­serves. What is more worrisome for petro­chemical producers, he stresses, is the re­gional oversupply of petrochemicals.

In the long run, many economists have cautioned, controls will harm Malaysia. Massachusetts Institute of Technology economist Paul R. Krugman warned in a Sept. 1 letter to the prime minister that "no matter how well currency controls are executed, the distortions they impose on the economy are serious, and tend to get worse over time."

Bankers involved in corporate financing of Asian chemical projects also tell C&EN that the measures adopted by Malaysia and the tense political situation the ousting of Anwar has created will discourage at least some investment. Berggren notes too that firms considering petrochemical projects not yet finalized may be scared away from Malaysia. But, he adds, for now there are more than enough projects being brought onstream in Malaysia.

Jean-Frangois Tremblay

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OCTOBER 26, 1998 C&EN 23