No Capital Controls Here,

UNCLAS KUALA LUMPUR 002330 SIPDIS STATE PASS USTR - WEISEL AND JENSEN STATE PASS FEDERAL RESERVE AND EXIMBANK STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN USDOC FOR 4430/MAC/EAP/J.BAKER TREASURY FOR OASIA AND IRS GENEVA FOR USTR SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV EPET MY SUBJECT: No Capital Controls Here, Officials Rush to Announce ¶1. Malaysia's ringgit weakened to a two-week low against the dollar on December 18, following news of Thailand's imposition of capital controls that would have locked up 30% of new inflows of foreign funds for a year in an effort to curb the appreciating baht. The Bursa Malaysia composite index declined 1.96% to 1060.36 points on the same day. Both the ringgit and the stock market bounced back after the Thai government reversed its decision. ¶2. A half dozen senior government officials rushed to announce that Malaysia would not follow Thailand's example. According to press reports, Second Finance Minister Nor Mohamed Yakcop announced Malaysia would not impose capital controls; rather, it would continue on its current path of "progressive liberalization." The central bank posted a brief statement on its website reiterating its commitment to continue the "series of gradual and sequenced liberalization of our financial markets and of the capital account" undertaken over the past three years. Prime Minister Abdullah Badawi, on a three-day visit to Venezuela, announced from Caracas that Malaysia does not plan to adopt a similar stance as Thailand, adding that Malaysia's financial system remained strong. Both Deputy Prime Minister Najib Razak and International Trade Minister Rafidah Aziz issued similar announcements. ¶3. Analysts agree that there are no reasons for Malaysia to follow in Thailand's footsteps. CIMB Head of Strategy Research Terence Wong told Econ Specialist that Malaysia was likely to be the last country to impose such controls, having only lifted the last of its 1998 capital controls -- the currency peg -- in July 2006. He blamed those earlier capital controls for the Malaysia's lagging stock market and FDI compared to other countries in the region. ¶4. COMMENT: Malaysia experienced only minor ripples from Thailand's economic belly flop, but it was encouraging that GOM officials were so eager to assure investors that Malaysia would not implement controls. Malaysia is scheduled in 2007 to undertake significant liberalizations in its financial sector. While there is much resistance from those benefiting from the status quo, following through on those plans is essential for the success of the U.S.-Malaysia Free Trade Agreement negotiations. U.S. negotiators may want to inquire about the substance behind these high level assurances of continued liberalization at FTA Round 4 in January. LAFLEUR