Once Bitten, Twice Shy

By Hakim Joe 

A lot of people don’t know this but Bank Negara Malaysia (BNM) was once the largest player in the international currencies market. That BNM lost over RM20 billion is not the point here. That BNM was destabilizing the international Forex is neither the point here as well. What is really important to all Malaysians is that BNM, together with the Malaysian government, denied any involvement in foreign exchange speculations until BNM’s annual reports to Parliament showed otherwise.

BNM’s venture into the Forex market started way before 1990 but this was done to stabilize the Ringgit as all central banks would have had positions on other currencies. Basically these are long term investments into stronger currencies like the US Dollar, British Pound, Japanese Yen and German Marks. 

In April 1991, a Reuter news agency report from London described BNM as “a dominant force on the foreign exchange scene for some years”. That BNM made reasonable profits during the years before 1992/3 could have been the incentive for them to “go into the forex market in a major way.” One would ask just how big BNM’s positions were. No one really knows as no White Paper was tabled in Parliament and the BNM Governor’s (Tan Sri Jaafar Hussein) resignation effectively halted all questions. 

In forex speculation, one holds a position between three to six months. Unlike trading in stocks, selling short is permitted in forex trading. All trades are done in US dollars and the market norm is to trade in US$1 million, US$5 million or US$10 million lots. A “yard” in forex parlance is to trade US$1 billion. 

BNM is different (Malaysia Boleh). BNM traded in US$50 million lots (per call). One international trader said that the only dealers rivaling BNM were the Japanese funds managers but while these funds entered the market only once or twice a year, BNM was doing it every trading day. Once again the question, “just how big were BNM’s positions?” The same trader replied “a few yards a day.” One senior currency dealer with a merchant bank in Singapore said that, “every time they (BNM) did a deal with one bank alone, they could do up to two yards, so you could imagine the impact they had.”  

One of BNM’s strategies was to hit a currency for a couple of yards and re-hit it again with another few yards a couple of minutes later (once the initial transaction has gone through). This is done to shock the forex market into action and to “strengthen” the targeted currency as the massive demand for it would hypothetically send other dealers scrambling for it. Additional demand would then send the currency up and BNM could then retire with a healthy profit without having to sit on that position for the next few months. Great tactics if one has the liquidity and if no one caught on to the scheme. 

Enters George Soros. In 1992, Soros sold the British Pound short. BNM bought in long. Then came the European currency crisis and the sterling bombed. Soros made US$1.7 billion. BNM lost US$5.5 billion. TDM calls Soros the “robber baron”. Soros laughs all the way to the bank. End of story. 

US$5.5 billion. One does not lose the entire traded amount. One only loses the fluctuations between the buying price and the selling price (less commission). If one were to lose US$5.5 billion, the exposure would have been typically five to six times that amount, meaning between US$27 billion and US$33 billion. That is three times Malaysia’s GDP or more than five times Malaysia’s foreign reserves (at that time in 1992). Even the entire BNM assets were only valued at US$20.7 billion in 1992. 

BNM’s 1992 report showed a RM9.3 billion (US$3.2 billion) loss due to forex speculations. A RM898 million were mysteriously transferred into the General Reserve Fund (supposedly from the year’s net operating profit). Is this money brought in to offset the forex losses? Could the forex losses be as high as RM10.1 billion? And why transfer a part (representing 64% of the total profits) back into the General Reserve Fund? BTW, the General Reserve Fund for 1990 is only RM274 million, and in 1991 it is RM200 million. In 1992, this ballooned to RM898 million. 

BNM’s 1993 report showed yet another RM5.7 billion (US$2 billion) loss due to forex speculations. This is a total of only RM15 billion (US$5.2 billion) but look closely into the reports and one can see that BNM has included the RM5.7 billion in forex losses as an Assets item under “Deferred Expenditure” and the “Other Assets” suddenly jumped from RM3.64 billion in 1992 to RM9.75 billion in 1993, an increase of RM6.1 billion in BNM’s net worth. Could this be some sort of creative accounting to offset hidden forex losses? If it is, the losses in 1993 could go as high as RM11.8 billion. And there is the RM711 million mysteriously transferred into BNM’s account from “Other Reserves” to offset the RM711 million in operating losses. 

As of the 31st of December 1993, the total contingent liabilities of BNM stood at RM3,631,499,381. This included RM2,207,209,411 (Malaysia’s quota in the IMF), RM1,413,664,726 (net liabilities on forward forex transactions) and RM10,665,244 (bilateral payment arrangements).  

BNM still has positions in the international forex market but these are merely central banks’ proven method of stabilizing one’s currency. Those heydays of active participation in currency speculations might be over (don’t hold you breath) but I might be wrong. 

Malaysia Boleh.