Economics Finance

Excessive speculation caused RM31.5 billion forex losses

Second Finance Minister Datuk Seri Johari Abdul Ghani

Second Finance Minister Datuk Seri Johari Abdul Ghani

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Written by Syndicated News
KUALA LUMPUR — Dec. 26, 2017: Excessive speculations were what caused Bank Negara Malaysia (BNM) to suffer foreign exchange losses of RM31.5 billion in the early 90s.
 
Citing an audit report prepared by the bank’s internal auditors dated January 21, 1994, Second Finance Minister Datuk Seri Johari Ghani said the monthly maturing buy and sell transactions which amounted to an average of RM140 billion in 1992 increased to a staggering RM750 billion the following year.

“A substantial portion of such transactions was very speculative in nature and did not reflect BNM’s mandate to maintain orderly condition of the foreign exchange market as per Section 4 of the Central Bank of Malaysia Ordinance,” Johari pointed out in an open letter to former prime minister Tun Dr. Mahathir Mohamad today.

The audit also highlighted that the magnitude of the transactions was considered very excessive, given that BNM’s shareholders’ fund was only at RM4.4 billion and the country’s international reserves were only at RM43.98 billion at the material time.

It also stated that the voluminous speculative activities the central bank had undertaken then were undertaken by the foreign exchange division of the banking department of the central bank, headed by its then advisor/manager Tan Sri Nor Mohamed Yakcop, who later became second finance minister.

In view of the scale of the losses, the government was forced to transfer its shares in Telekom and Tenaga Nasional to BNM at the nominal value of RM1 per share. These shares were immediately revalued by BNM at RM22.10 and RM19.30 per share for Telekom and TNB respectively.

Additionally, BNM had to dispose of its Malaysia Airlines shares to a third party at RM8 per share and MISC shares at RM10 each to the Retirement Fund Incorporated to realise a gain.

“If the speculative foreign exchange losses were not real, the government would not have taken these drastic actions to cover BNM’s losses at that material time,” said Johari.

The minister said it was very important for the public to understand the difference between speculative foreign exchange activities and orderly management of the foreign exchange market.

“The speculative foreign exchange activity, to put it in simpler words, is a kind of gambling activity in the hope for quick returns.

“The orderly management of the foreign exchange market, however, is very different, in that it is a facilitation of liquidity by BNM for the purpose of mitigating imbalances with respect to the ringgit’s supply and demand in the market,” he said.

According to Johari, BNM and the country have since come a long way, particularly in instituting reforms and checks and balances with regard to its foreign exchange forward transaction activities.

As a result of these reforms, Malaysia’s economy remains resilient and BNM’s ability to safeguard financial and economic stability remains uncompromised, despite the recent volatility in capital flows and the ringgit.

“I have said enough on this subject and if understanding of the truth is not the objective of the discussion, then there is nothing much I can say,” he emphasised, adding he did not want to prolong the discussion, especially since there is a team from the Police investigating the matter. — Bernama

 

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