This analysis by K J Khoo was originally published in Aliran Monthly in 1993 (Vol. 13 Issue no. 4). We are re-publishing it, with minor amendments, in view of recent reports linking the sale of MAS shares to Bank Negara’s losses in foreign exchange speculation. These reports reinforce the central points in the article relating to accountability and transparency. These points are evidently valid to this day.
There has been no attempt to update the figures about the quantum of the loss. The recent reports suggest the quantum to have been much larger than estimated in the article. However, these are claims of an interested party, and the one person who should have known, then Finance Minister Anwar Ibrahim, cited figures of RM10, 15, 20 billion, and “in the range close to USD10 billion”. We should reserve judgment and continue to call for a full accounting, including the knock-on consequences. Such an accounting is best served not by looking for individuals to blame, but by an accounting of policy, checks and balances, and the chain of command – and the lessons learnt and implemented.
Even as the country grows in wealth and confidence, concern over the accountability and transparency of government assumes increasing importance. Yet, issues of national concern continue to be swept under the carpet as damage control. Public relations take precedence over forthright explanation, and servile editors aid and abet the powers-that-be. The Bank Negara affair is simply another example. In the process, ordinary citizens are deprived of their right to know. The result: a thriving rumour mill and an ill-informed electorate – hardly the best recipe for democracy.
Finally, the Prime Minister [Mahathir] spoke. And what a revelation it was after Bank Negara’s confused jargon or the Finance Minister’s cavalier excuse about how complex the whole matter was. There is now much less fog about Bank Negara’s involvement in the foreign exchange (forex) market and the nature of its RM9.3 billion loss in 1992.
Never mind that in November 1990 Dr Mahathir angrily denied that Bank Negara went into the forex market to make profits. This time around, and true to form, Dr Mahathir called a spade a spade: he readily acknowledged the Bank’s “forays” into the forex market – not only to protect the ringgit but also to make profits.
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He conceded that such was not the general practice of central banks but he assured us that Bank Negara has the capability to do so.
But he complained that no one complimented the Bank when it made profits in the past – a strange complaint. For if we shouldn’t worry about paper losses, as Bank Negara tells us, why should we cheer paper gains, as Dr Mahathir regrets we didn’t?
Unless, of course, the RM9.3 billion loss is real.
After Dr Mahathir’s clarification of 20 April 1993, would anyone still care to explain that the lion’s share of the loss was primarily due to the ringgit’s appreciation?
The fact of losses as such is not at issue here. Nor is the issue primarily about looking for scapegoats or removing individuals. No one save the Prime Minister has publicly raised – and rejected – this possibility.
One important issue is the magnitude and the cause of the loss. Even if Bank Negara’s profit-seeking in the forex market was proper central bank policy, the size of its loss points to a major failure in checks and controls – both within the Bank, and between the Bank and the Finance Minister.
Did no one – not the Governor, Advisers and Board members of Bank Negara, the Finance Minister and the Prime Minister – know when to call a halt to the forex “foray”? Was everyone gripped, as it were, in a gambling fever, merrily persisting as the losses mounted, waiting optimistically to recoup them in the next transaction?
One critical issue is the less than candid handling of this “Bank Negara affair”. Not a word of it was heard until it could no longer be contained – at which point “damage control” was uncorked.
Imagine the puzzlement of the average Malaysian being deluged by a major “explanation” from the Bank Negara Governor on 19 April. Imagine his or her bewilderment when waking up to screaming front-page headlines of “Bank Negara explains” or “Akibat Ringgit Naik” the next day. The sad fact is that the local media – so brave in exposing the escapades of the royalty and in opposing their immunity only so recently – had dishonourably left too few of us with any inkling that anything needed explaining at all.
To put it differently, the issues, fundamentally, are about accountability, the transparency of government policy, and checks and balances.
Short memories
When Bank Negara Governor Tan Sri Jaffar Hussein said “it is amazing how short the memory is”, perhaps he regretted that few recalled how Bank Negara made profits in the past.
But our memory is not so short as to forget an unhappy past when BMF’s losses were blamed on the Brits and their messing up of the Hong Kong property market, when Maminco’s losses were blamed on the London Metal Exchange’s misconduct, and when the EPF’s losses were blamed on Pan-El’s failure. Are we now to accept blithely that the Bank Negara’s “paper” losses were due to the mysterious fluctuations of the foreign exchange market?
If over these years our foreign reserves, as a measure of our economic health, have grown, it was not just because the Bank’s specialists “made profits”. Much of it owes to the responsibility of the man and woman in the street who have been told to work harder, consume less and save more – and who have responded magnificently to these calls.
Now, the people have to directly forego RM500 million because of the Bank’s losses. In 1991, Bank Negara transferred RM1 billion to the government. Last year, the Bank could only transfer RM500 million.
As such – unlike The Star columnist, P Y Chin, who thinks we should ask no more questions about this Bank Negara affair, unlike New Straits Times editor, A Kadir Jasin, who urges the “man in the street” to leave the matter to the forex specialists, and unlike Finance Minister Anwar Ibrahim who was so easily “satisfied” with Bank Negara’s explanation – the man and woman in the street reserve the right to ask the following questions and expect the Finance Minister to give clear answers.
- Why was Bank Negara speculating in the forex market? Since when did this become sound and proper central banking practice and Bank Negara policy?
- Who authorised such an involvement? Were no limits set or were they breached?
- Was the whole Cabinet aware of the extent of involvement and the mounting losses? Did no one ever counsel prudence?
- Was there no system of checks and controls, within Bank Negara and between Bank Negara and the Finance Ministry? Had the Board of Bank Negara no monitoring role?
- Are there any guidelines on the composition of our foreign reserves? Were these guidelines breached?
- Was there no fear that other central banks might retaliate against the speculation on their currencies?
Central banks are not supposed to engage in forex speculation – to safeguard everyone’s interest. There may be thrills, sometimes even profits, in forex trading. But what, for example, would happen if Taiwan’s central bank, with its massive foreign reserves, were to decide to speculate on the ringgit in the forex market?
If government deems forex speculation unavoidable, it should set up a separate agency expressly for this purpose, as in the case of a neighbouring country. It should not allow, much less encourage, Bank Negara to play with the nation’s reserves in the forex market under the guise of “reserves management”, only to excuse its losses by moaning about the so-called “dilemmas” and “ironies” of this onerous task.
Or to try and camouflage the losses as in fact happened on 30 March – when this episode began.
Banks Negara's explanation
On 30 March 1993, Bank Negara released its Annual Report for 1992. Was it an April Fool’s Day joke, some sharp-eyed reporters wondered, when they detected that the Bank had lost RM9.3 billion or one-third of the nation’s foreign exchange and gold reserves?
Questioned about the loss, Bank Negara issued a three-point explanation on 1 April. The central bank confirmed and explained it as the result of the ringgit’s appreciation against major foreign currencies. It all seemed very proper, for Bank Negara seemed motivated by a need “to defend the ringgit” and “to keep down inflation”.
If the losses were made despite all prudence and propriety, why was it necessary for the Bank to be so shy in revealing it and so cagey in explaining it?
It took Kadir Jasin ten days to put his “other thots” to it. But even he had to shake his head: “we cannot hide the losses under the cover of inflation control”, “we cannot treat the losses lightly”, “we have suffered similar losses in the past due to injudicious and incompetent execution of market operations”, and “good intentions alone are not sufficient to justify these losses” which may be due to “bad management”.
Was Kadir Jasin rapidly recalling the likes of Maminco and Makuwasa in the not too distant past when losses were brushed aside as due to “injudicious and incompetent execution of market operations”, the malevolent intentions of others or simply forces beyond our control – and justified by “good intentions”?
Maybe. Still, he would have us adopt the position that “it is not for the man in the street to ask” how Bank Negara conducts its operations. That is for the “money market specialists”. A fine but transparent attempt at containing the crisis of credibility and hopefully defusing it.
But it wouldn’t go away – mainly because the three-point statement amounted to little more than a jargon-filled brush-off, while the text and accounts in the Annual Report were remarkable for what they didn’t reveal.
No one was able to control the tide of innuendo and rumour in financial circles.
The KLSE had earlier been excited by talk that the Auditor-General, Tan Sri Ishak Tadin, apparently refused to approve Bank Negara’s original accounts until some changes had been made – presumably to render the accounts more transparent.
And, the Finance Minister himself did not appear to take the three-point explanation seriously, telling reporters on 13 April that Bank Negara should be given a chance to investigate and explain.
The result was that the Bank Negara Governor made his lengthy statement on 19 April, three weeks after the “Bank Negara affair” had graced the front pages of the Singapore Business Times and the Asian Wall Street Journal, and four days after it appeared in the Far Eastern Economic Review. Jaffar Hussein’s 19 April statement strenuously defended his stewardship of the Bank but elaborately avoided several basic issues.
He also said he had forwarded a complete report to Finance Minister Anwar Ibrahim, who declared himself “satisfied” with it.
This is the same Minister who has expressed tremendous concern for poverty eradication. Yet, he has been prepared to forego RM500 million as a result of Bank Negara’s losses. Imagine, he could have given an outright grant of RM5,000 each to 100,000 poor families – more than the 89,000 very poor families who have recently received loans under the ASB scheme.
Didn't the Finance Minister know?
In fact, however, the Finance Minister should have known and tracked the matter better.
The Central Bank of Malaysia Ordinance 1958 requires Bank Negara to submit an account of its assets and liabilities to the Finance Minister once every two weeks. The law also requires Bank Negara to keep the Minister informed of the monetary and banking policy pursued or intended to be pursued by the Bank. Should the Minister disagree, he has the power to issue binding directives on the Bank.
Moreover, Bank Negara’s official publication, Money and Banking in Malaysia claims “there is frequent contact between the Governor of the Bank, including the Bank’s Board, and the Minister of Finance where views are exchanged and problems discussed [and] the Treasury is kept fully informed of current and proposed monetary policies or measures, and problems are discussed in advance where a change in policy requires Government approval”.
Financial analysts who had examined the accounts and the three-point statement concluded that Bank Negara was guilty of what Anwar Ibrahim had so recently and so earnestly warned Malaysian stock market investors against – wild speculation and gross imprudence.
On 2 April 1993, the Singapore Business Times reported that “in recent years, Bank Negara has earned itself a reputation as one of the most aggressive speculators in international forex markets such as New York, London and Tokyo”. The Far Eastern Economic Review of 15 April stated matter-of-factly that “Bank Negara has long been known to do more than merely stabilise its currency, by speculating on foreign exchange movements”.
There is more. Money market analysts maintained that given our healthy economy, and given that the ringgit was not under attack, the cost of keeping down inflation and the appreciation of the ringgit would have accounted for about RM3.5 billion. The remaining RM6 billion loss cannot be accounted for in this manner. Such a massive loss, according to the money market analysts, could only be due to speculation in the foreign exchange market – that largest and wildest casino where hundreds of millions can be, and are, made or lost in mere seconds.
Last year, that casino evidently became too wild for Bank Negara.
The stronger the ringgit, the heavier our losses
For what else could have caused the losses? Can we believe that it was largely due to the appreciation of the ringgit or, as it has been put to us, “the stronger the ringgit, the heavier our losses”?
Let us allow that for argument. Going by the Bank’s Annual Report, the ringgit appreciated by almost 6 per cent against the basket of currencies of our major trading partners. Had Bank Negara consistently held its foreign proportion to this trade-weighted currency basket, then the loss due to the ringgit’s appreciation would have been RM3 billion – at the most – and it would have been a paper loss.
When interviewed by the Asian Wall Street Journal, one economist said: “We all knew they would have a high revaluation charge to account for the appreciation. That’s not surprising. But it doesn’t explain the magnitude. Conservatively, the loss should have been only about RM3 billion.”
In other words, as a banker explained, “it’s only if you were actively trading, as Bank Negara does, that you’re exposing yourself to the volatility of the market.” And what was Bank Negara doing if all its “shifting the composition of its reserves to protect their external value” did not amount to speculative trading?
The same banker noted that Bank Negara’s periodic statements of its reserve position last year indicated that the contingency reserve funds showed little change at the end of March, but it fell to RM5.8 billion at the end of June, and fell further to RM1.7 billion at the end of July
These declines trailed the ringgit’s appreciation but took place before Bank Negara incurred most of the interest costs from its money-market operations.
Bankers and financial analysts suggest that the timing and size of the declines also pointed to losses from foreign exchange speculation. Several of them added that when the ringgit started to depreciate against the trade-weighted currency basket in October 1992, Bank Negara’s foreign exchange reserves should have seen a rebound. But the contingency funds continued to decline until the end of the year.
Viewed in this context, the Governor’s televised statement of 19 April virtually confirmed the correctness of such interpretations. He could not provide a satisfactory answer on the “size and details of the loss”, he pleaded, on grounds that Bank Negara is still in the “foreign exchange business”. To provide details, he added, would be to “show my hand to the market” — an unfortunate metaphor more befitting a poker player than a central banker.
The Governor argued that Bank Negara’s future effectiveness in “reserves management” depended upon not giving “advance clues about the bank’s intentions”. Surely any central bank’s intentions on the international scene are, or should be, transparent: to defend the nation’s currency, and, to quote the Bank’s own publication, “to monitor and safeguard the value of the international reserves” – not to engage in profit-seeking.
The nonchalant manner in which the losses were dismissed – that in an unstable market, you win some and you lose some – was truly amazing. To dismiss it as a trivial problem of “paper losses” and to discredit the notion of the accounting year as mere convention, quite meaningless in the long term, took the cake. Which chairman of which loss-making bank or corporation would not have given an arm to be able to get away with such justifications?
Bank Negara remains very active in the forex market. This is seen clearly from the RM2.7 billion in contingent liabilities on foreign exchange contracts which were not yet due when the accounts were drawn up at the end of 1992. Will these liabilities, now losses on paper become real losses? Jaffar Hussein would only say that “their final outcome will depend on the exchange rates prevailing at the time of the maturity of the contracts”.
True enough. But once more the point must be the magnitude of the involvement and for what purpose. It lends credence to Singapore money market sources’ claims that Bank Negara is known to place deals of up to RM2 billion at a time and may be exposed to anywhere between RM6 billion and RM16 billion.
Inexcusable
This is the heart of the matter – not the fact of Bank Negara’s losses as such, but the size of the loss for reasons of profit-seeking in the forex market. Shrugging off a loss of RM9.3 billion as mere “paper losses” beyond our control is the height of non-accountability.
It would have been regrettable but excusable if the losses were incurred as a result of fighting off attacks against the ringgit or of stabilising exchange rates. Then the Bank would have been doing what it is meant to do. The Bank of England and the Danish central bank tried to do just that six months ago when their reserves were virtually wiped out in their desperate attempts to defend their currencies.
But such a loss, for the reasons now evident, is inexcusable. The Prime Minister hath spoken: no heads will roll – although some will sagely nod in agreement.
It would appear that the immunity removed from our Sultans has been transferred to the government.
For the time being, the Bank Negara affair has ended on an ironic note. Bank Negara, the country’s financial watch-dog, has apparently been quite ready to contravene Malaysian accounting standards. First, it admits to inconsistencies in its previous accounting. Second, for 1992, it changed its accounting policies: it revalued its foreign exchange and gold reserves, but provided no information as to the impact of such a change.
To be sure, this is not fraud or criminal breach of trust. But does it help “to develop a society which respects the truth”, as Jaffar Hussein urged when he spoke during his acceptance of an honorary doctorate from Universiti Utara Malaysia in November 1991?
The matter of Bank Negara’s RM9.3 billion loss surely cannot end just yet and just like this.
The Finance Minister might well be “satisfied”. But damage control alone will never retrieve Bank Negara’s damaged credibility".
Postscript (2006)
The then Governor was right on one thing: people have short memories. Bank Negara in fact suffered no long-term damage to its credibility in the aftermath of the debacle.
The boom years of 1993-97 induced amnesia – and even more spectacular carelessness – until we were brought thudding down to earth in the, in our case, mainly forex speculation-driven financial crisis of 1997-98. And then we were caught up in the hunt for cronies, many of whom have been cut to size, only to replaced by others.
As should be clear to everyone, the financial crisis effectively displaced us from one to another, much emasculated, growth path. There has been no recovery, if by that term is meant a return to a temporarily interrupted progression. Instead, we have limped along.
Yet, what was revealed by the Bank Negara forex episode remains very much with us today through a change of administration – the fundamental issues of policy, accountability and transparency. Damage control, cooking the figures to make them look better than they are actually are, remains much the order of the day.
Yes, there may be more controversies in the media today. But we are no better informed, nor is there any greater participation and public debate about the policies and issues that may be crippling us.
We could do much worse than re-visiting the Bank Negara forex episode to understand how and why it could have happened, why policy and regulatory mechanisms could have failed so spectacularly – in order to improve our institutional framework in all sectors, rather than falling back on calling in political intervention on just about every matter.”
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