changes in malaysia: capital controls, prime ministers and political connections heather mitchell -...

Changes in Malaysia: Capital Controls, Prime Ministers and Political Connections

Heather Mitchell - RMIT University

Saramma Joseph - Metropolitan College, Malaysia

RMIT University©2009 School of Economics, Finance and Marketing 2

On 1st September 1998 Malaysia introduced capital controls

• On 2nd September Anwar Ibrahim was arrested

• He was an outspoken opponent of capital controls

• Other countries had been hit earlier by crisis

• Thailand in late 1996-1997

• South Korea and Indonesia 1997

• These countries reduced restrictions on the flow of capital to facilitate IMF loans


What were these controls?

• Fixed exchange rate of 3.8 ringgit to US dollar

• Ringgit no longer legal tender outside Malaysia

• Offshore trading in Malaysian shares was banned

• Repatriation of foreign owned investments banned for one year

• All trade settlement had to be make in foreign currency

• All ringgit assets held abroad had to be repatriated

• and the list goes on ……


Capital Controls: Good or Bad?

• Definitely no agreement!

• Krugman (1998) capital controls should be used even at the risk of increasing corruption

• IMF, Sinclair Davidson – capital controls bad

• Were they effective – still no agreement

• Rodrik and Kaplan (2001) – Malaysia did better than other SE Asian countries

• Dornbush (2000) found the evidence unclear


General Agreement

• Capital controls allow politicians to protect or favour their mates “cronies”

• Did this happen in Malaysia?

• Evidence strongly suggests it did

• Johnson & Mitton (2003) – compared firms allied with Mahathir to those allied with Anwar

• Firms with a crony connection to Mahathir increased in value by $5 billion in September 2008

• 32% of that gain can be attributed to their connection to Mahathir


Our Questions

• Have politically favoured firms continued to benefit from the controls?

• Have they suffered as controls have been reduced?

• Do we find similar effects for firms with government investment or control?

• Have these effects been impacted by the change of prime ministership from Mahathir to Badawi?


Major Events

• Restructuring period 1/10/1998 to 30/9/2000 (J&M)

• Repatriation restrictions lessened

• Forced mergers of firms in finance industry

• Crony financial firms should do well but other crony firms will lose their advantages

• Consolidation period 1/10/2000 to 21/6/2002

• Final repatriation restrictions removed

• No substantial differences in firms performance


Major Events

• Transition period – 22/6/2002 to 30/10/2003

• Mahathir’s shock resignation, followed by a planned handover to Badawi

• All firms will be adversely affected, especially those with Mahathir connection, but those with Anwar, not as badly

• Resolution period – 31/10/2003 to 21/7/2005

• Last of controls, including currency peg, removed

• Anticorruption measures introduced

• Crony firms should do worse, especially financials


Major Events

• Final Period – 22/7/2005 to 30/6/2006

• Nothing much going on.

• Included for comparison purposes

• Mahathir seems to have lost influence

• No difference between crony firms and others


Classification of firms

• Crony firms – personal relationships with politicians – based on listing in J&M

• Government linked companies (GLC) – commercial objective, but government holds a direct controlling stake

• Khazanah firms – government holds an investment through its investment arm Khazanah Nasional Berhad

• Government can openly favour 2nd two and connection is stable


Data

• Monthly returns data on 625 firms listed on KLSE main board

• Both returns and accounting data sourced from Datastream

• Firm specific control variables of size, industry type and leverage used instead of risk adjusted returns

• Beta values have been found to be highly variable during this period


Preliminary findings

• Raw data – table 1

• Connected firms of all three types are substantially larger than those without that connection

• Significant differences exist between most of the other performance measures considered

• Controlling for size and profitability – table 2

• Khazanhah firms are different, but cronies and GLCs are not different from other groups


Model

• RET – return during period

• JM, GLC & KNB – dummy variables for connected firms, also single variable for all connection types

• TA & LEV – controls for size and debt ratio

• ID – industry dummy variables

• Financial firms analysed separately

iiii KNBGLCJMRET 3210

81

,554 )ln(toj

iijjii eIDLEVTA


Results

Period Expectation (Connections) Finding

Restriction Financials up – others down Nothing

Consolidation Nothing Financials – GLCs worse

Others – only KNB better

Resignation All firms down

Anwar firms less badly effected

Other cronies worse

First month only – all firms down

GLCs worse

Anwar financials better?

Whole period – GLCs worse (only effect)

Transition Crony firms worse Crony financial firms worse

Final Nothing Nothing


Conclusions

• Some evidence that crony firms suffered through withdrawal on capital controls – but only those in finance industry

• Weak evidence that “Anwar” finance firms were less concerned with Mahathir’s resignation

• Government controlled firms often underperformed

• Political connection no longer seems to have market value


The End

• For copy of full paper email

• [email protected]

changes in malaysia: capital controls, prime ministers and political connections heather mitchell -...

Documents

malaysia slide

crony firms

mahathir slide

firms performance slide

anwar firms

favoured firms

financials slide

flow of capital