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

1. Changes in Malaysia: Capital Controls, Prime Ministers and Political Connections Heather Mitchell - RMIT University Saramma Joseph - Metropolitan College, Malaysia

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 School of Economics, Finance and Marketing

3. 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 …… School of Economics, Finance and Marketing

4. 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 School of Economics, Finance and Marketing

5. 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 School of Economics, Finance and Marketing

6. 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? School of Economics, Finance and Marketing

7. 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 School of Economics, Finance and Marketing

8. 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 School of Economics, Finance and Marketing

9. 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 School of Economics, Finance and Marketing

10. 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 School of Economics, Finance and Marketing

11. 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 School of Economics, Finance and Marketing

12. 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 School of Economics, Finance and Marketing

13. 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 School of Economics, Finance and Marketing

14. Results School of Economics, Finance and Marketing

15. 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 School of Economics, Finance and Marketing

16. The End • For copy of full paper email • heather.mitchell@rmit.edu.au School of Economics, Finance and Marketing