Malaysian Maverick: Mahathir Mohamad in Turbulent Times Page 25
Bank Negara attributed the charge almost solely to the appreciation of the Malaysian ringgit against the bank's foreign-exchange holdings. It did not mention going for broke on the British pound and other currencies that fluctuated wildly and fell before and after the crisis in the European Exchange Rate Mechanism. To meet its low-inflation target, the bank said it soaked up the heavy flow of foreign funds into the booming Malaysian economy. It diversified the inflow, mostly denominated in U.S. dollars, into other currencies in an attempt to protect the value of its external reserves, it said.[93]
The trouble with this explanation was that the dollar depreciated far less than some of the currencies of Malaysia's other trading partners. In fact, the ringgit appreciated against the currencies of all Malaysia's major trading partners, but only marginally against those of the United States, Japan and Singapore, the largest of its partners. This indicated that Bank Negara's foreign-exchange portfolio was heavily weighted in favour of currencies less relevant to Malaysia. Chief suspect: the pound, against which the ringgit appreciated 29.1 per cent during the year and as much as 33.6 per cent at its peak.[94]
Bank Negara advanced another reason for the charge against reserves. It said a portion of the amount could be attributed to a change in its customary accounting policy to value its gold and foreign reserves at prevailing market levels. In the past, the bank had valued its reserves at the lower of historical cost or market rates. The adjustment took the book value of Malaysia's reserves to a whopping RM46 billion at the end of 1992 from RM29.2 billion a year earlier.
The RM9.3 billion charge nearly wiped out all of the special reserves set up by Bank Negara. They comprised the Exchange Rate Fluctuation Reserve, the Investment Fluctuation Reserve, the Insurance Reserve and the Contingency Reserve. The bank said in its statement that "such reserve accounts were created precisely for this purpose, i.e., to act as cushion for undue and unpredictable changes, emanating in most part from international developments completely beyond the control of the bank, and to enable the bank to meet its objectives of policy without unleashing destabilizing effects on its normal operations".[95]
Although fighting inflation was bound to have cost Malaysia, few economists or money market professionals accepted that it could account for the entire loss, while the revaluation of the reserves seemed like no more than an attempt to dress up the balance sheet. The sensitivity of the matter was reflected in the caution of the local media, which did not report the bad news for two weeks after the 30 March release of Bank Negara's report. Even then it took the form of a comment by the new Minister of Finance, Anwar Ibrahim, that he had asked Bank Negara for additional information about its losses. Anwar said later he had issued "strong advice" to the central bank in March to cease speculating.[96] It emerged that the bank might lose considerably more on foreign-currency trades anyway. A figure of RM2.7 billion in contingent liabilities mentioned in the bank's report represented foreign-exchange contracts carried forward into the following year. Whether that sum translated into profit or loss would depend on exchange-rate fluctuations in 1993.
In Parliament, Lim Kit Siang called for a royal commission to inquire into the losses, which he attributed to Bank Negara pouring "tens of billions of ringgit" into the pound and hoping "to make a killing" by buying long, expecting the pound to recover with the support of the British government.[97] Although criticism was growing in the absence of a plausible explanation, Dr. Mahathir indicated that Bank Negara would not be blamed. He told reporters, "There were times in the past when we made profits. At that time, we kept quiet but now when there is a fall, we want to take action. That is not the way."[98]
In the closing days of 1993, Bank Negara took advantage of its ongoing battle with speculators to depress the value of the Malaysian currency, which improved the bank's year-end financial position by raising the value of its foreign currency and gold reserves in ringgit terms. For months, the bank used a variety of tactics, some of them unusual, to try and dissuade speculators from thinking that they could make quick profits on a rising ringgit. By dumping large amounts of ringgit into the market to buy dollars towards the end of December, the bank pushed the local currency down to a two-year low of around RM2.73 to the dollar from RM2.55 for most of the year.[99]
The government also rushed through the sale of Bank Negara's 42 per cent of Malaysian Airlines, effectively privatizing the carrier. A 32 per cent stake realized RM1.79 billion, at the time an inexplicable windfall for the central bank, as businessman Tajudin Ramli, a protégé of Daim Zainuddin, the former finance minister, agreed to pay RM8 a share when the market price was only RM3.50. Bank Negara sold its remaining shares to another government-controlled agency.[100] Driven by Dr. Mahathir, the deals were arranged hurriedly in the last two weeks of December 1993 to bolster the bank's bottom line.[101] In 2000, the government repurchased Tajudin's stake at RM8 a share, when it was trading at around RM3.60, provoking an outcry that Dr. Mahathir's administration was bailing out a crony. In 2006, Tajudin alleged in a lawsuit that he was forced to buy Malaysian Airlines in the first place as a "national service". He said he was directed to do so by Dr. Mahathir and Daim, who told him the acquisition was to save the central bank.[102]
Neither the accounting slight of hand nor the abrupt disposal of the airline could hide the ugly truth, however: more huge losses from foreign-currency transactions. The 1993 losses, artificially depressed to RM5.7 billion, nevertheless wiped out Bank Negara's remaining reserves and paid-up capital of nearly RM3.8 billion, and would have crippled the bank except for government help.[103] According to a note in the annual accounts, the RM5.7 billion represented the bank's "net deficiency", and the government had undertaken "to make good this deficiency as and when required to do so by the bank".[104]
Lim Kit Siang renewed his calls in Parliament for an investigation, but was ignored by a government with an unassailable majority. He accused Bank Negara of "dishonest and unethical accounting" to cover up losses amounting to billions of dollars in "a conspiracy of disinformation and misinformation". Rather than the almost RM16 billion in losses reported for 1992 and 1993, he said the actual figure could be as high as RM30 billion.[105] Former finance minister Tengku Razaleigh Hamzah, who had formed the opposition Semangat '46, put the two-year losses at RM31 billion.[106] Bank Negara took ten years to fully amortize the loss, finally closing the books on it in 2003.[107]
Jaffar Hussein, the Bank Negara governor, took the rap and quit, along with Nor Mohamed Yakcop, the third in command at the bank and the official in charge of foreign-exchange operations. "I take full responsibility," Jaffar told the press. "In the absence of perfect hindsight, mistakes will be made; indeed, mistakes were made." He listed "errors of judgment" in anticipating global currency gyrations and in not installing trading safeguards to limit the central bank's losses.[108]
Nagging questions remained, however. With his commitment to "profit optimization and market expertise" in managing the country's reserves,[109] Jaffar undoubtedly allowed the bank to speculate. But it was out of character for him, an accountant by training, to have permitted the undisciplined trading to persist on such a scale for so long. In nine years while he was governor, Bank Negara proved itself a strong and vigilant regulator of other financial institutions, while failing to keep its own currency traders in check.
Both Daim Zainuddin, who was finance minister from 1984 to 1991, and Anwar Ibrahim, who replaced him until 1998, said they did not know Bank Negara, which the finance ministry supervised, was speculating. This is especially puzzling in the case of Daim, a confidant of Dr. Mahathir, who not only knew about the speculation but tacitly approved it. Daim said that when he learned what was going on in 1989, he called Jaffar Hussein and cautioned him, but "he said 'not to worry; we've got everything under control'. I said OK".[110]
Years after he had been dismissed and jailed by the prime minister, Anwar said Dr. Mahathir and Daim were responsible for the currency speculation with Nor Mohamed, behind the late Jaffar Hu
ssein's back.[111] Anwar said it was only after he took over as finance minister and travelled abroad that a Swiss friend had told him Bank Negara was one of the top three speculators and considered a rogue bank. He said he was incredulous and sought clarification from Jaffar, who was similarly in the dark. Attempts to sort it out with Dr. Mahathir had gotten nowhere, Anwar said: The prime minister played down the problem and accused the Western media of trying to undermine Malaysia.
The mystery only deepened with time. In 1998, Dr. Mahathir appointed Nor Mohamed Yakcop, who had undertaken the gambling spree and departed for the private sector four years earlier in disgrace, to the post of economic adviser to the government. When Abdullah Badawi took over as prime minister in 2003, he promoted Nor Mohamed to second finance minister.
The Perwaja perils
In one of those moments that return to haunt politicians, Dr. Mahathir visited steelmaker Perwaja Trengganu Sdn. Bhd. in 1991 and declared, "Perwaja is one of the most successful government-owned companies in the country, and it has made all of us proud." [112] He was not merely premature, but ignominiously incorrect. Perwaja was Malaysia's biggest industrial basket case then, and it went downhill afterwards.
As a showcase element in Dr. Mahathir's state-led industrialization drive in the 1980s, Perwaja looked like no more than a shining example of a politically conceived, commercially questionable and poorly executed enterprise that predictably failed. Despite lavish funding, a robust economy much of the time and protection from competing imports in the form of both tariffs and quotas, the company was never able to produce steel profitably. It suffered from chronic operating problems and a crushing debt load, including stiff foreign-exchange losses on heavy borrowing abroad. Even after the government decided to swallow RM9.9 billion in accumulated losses and privatize Perwaja in 1996, it continued to flounder.
Yet there was a more sinister side to Perwaja that guaranteed it an exalted place in the pantheon of Malaysian financial scandals. An unknown portion of the RM15 billion or more that the company consumed was ripped off in various rackets and ruses. Although both internal and external reports confirmed that the company was bled white, almost nothing was done to bring the culprits to justice and recover the funds. Eric Chia, a former chief executive officer, was arrested only after Dr. Mahathir left the prime minister's office, and he was eventually found not guilty of criminal breach of trust involving the relatively paltry sum of RM76.4 million.
The integrated steel complex in Trengganu state was meant to supply domestic needs using energy from offshore gas fields to fire the rapid development of a heavy industrial base. Built first was a RM1 billion plant to smelt imported iron ore into hot briquetted iron, also known as sponge-iron, which then would be converted into billets, the material used for manufacturing a variety of steel products. The project was undertaken in 1982 by a joint venture between state-owned Heavy Industries Corporation of Malaysia, which took 70 per cent of the equity, and a big-name Japanese group led by Nippon Steel Corporation, which held the rest. Significantly, the Japanese government and consortium members financed most of the cost with concessional yen credits.
As the yen appreciated dramatically after the Plaza Accord was signed in 1985 and interest payments mounted, Perwaja encountered production problems and racked up large debts. In 1987, the direct-reduction plant that was supposed to produce sponge-iron but never functioned properly, was closed. Frustrated by the setbacks, Dr. Mahathir stripped the Heavy Industries Corporation of its stake in Perwaja and handed it to the Ministry of Finance. Nippon Steel and its partners eventually relinquished their shareholding, leaving the company in the hands of Malaysian federal and Trengganu state government agencies. Dr. Mahathir said later that the people who were put in charge initially "had no idea of managing a steel mill at all...So I had to change" them.[113]
Dr. Mahathir turned to his friend, Eric Chia. [114] The burly, tough-talking Chia, who once headed UMW Holdings Bhd., an auto and heavy-equipment assembler, took over Perwaja in 1988 as the prime minister's personal troubleshooter with the authority to do what was necessary to turn it around. Just how much latitude he had became clear when a finance ministry representative on Perwaja's board tried to tighten internal financial procedures. Chia told him to get lost: He was reporting to Dr. Mahathir and had approval to do as he pleased.
With characteristic gusto, Chia plunged into the task of revamping Perwaja and building an integrated steel industry around it. The company poured in a further RM2 billion, building a new direct-reduction facility in Trengganu, and a rolling mill and a beam-and-section plant in Kedah. The funding included a fresh government equity injection of RM650 million. Perwaja also borrowed heavily from local and overseas banks, among them Bank Bumiputra, whose loans to the steelmaker totaled RM860 million. The Employees Provident Fund, the national pension plan that was used as a conduit for bumiputra share allocations in the tin caper, extended a loan of RM130 million, guaranteed by a group of Malaysian banks.
Chia's hustle and confidence seemed to work. He announced Perwaja's first profit in the early 1990s, winning praise from Dr. Mahathir, who visited the Trengganu site and basked in the glow of apparent success. Chia's boast that the government would recoup its investment quickly by privatizing the main operating unit, Perwaja Steel Sdn. Bhd., and listing it on the stock exchange, appeared close to reality.[115]
Then everything fell apart. Actually, it was an illusion all along, discovered after Chia resigned abruptly in August 1995 with scarcely a word of explanation for his seven years as managing director. Anwar Ibrahim, the finance minister, told the Malaysian Parliament that Perwaja lost RM376.5 million in the year ended 31 March 1995. [116] It swelled total losses since Perwaja was formed to RM2.49 billion, two and a half times the company's paid-up capital and reserves, and up from RMl billion in accumulated losses when Chia took control. Long-term debt was threatening to obliterate the company. [117] Anwar, whose finance ministry's holding unit owned 81 per cent of Perwaja, announced that the government would honour all Perwaja's commitments and repayments. The pledge was considered vital, as a default on one loan could trigger cross-default clauses in loan agreements with other creditors, exposing Malaysia to a potential banking crisis. [118] Anwar ordered a comprehensive external audit of the company's finances and management by accounting firm Price Waterhouse & Company.
A confidential report prepared by Perwaja's new management team, under Managing Director Wan Abdul Ghani Wan Ahmad, was even more stunning. It sent shockwaves through Malaysia's political and business establishment after it was submitted to Anwar at the end of 1995 and leaked to the press. Perwaja's situation was perilous, requiring at least RM400 million in cash immediately to keep going. Unable to pay some creditors, it was seeking a moratorium on repayment of interest and principal on part of its RM5.7 billion in bank borrowings. "In the current global steel scenario, where competition is overwhelming and margins are thin, Perwaja's strategy of over-gearing is suicidal," the report said. It added, "Perwaja is over-borrowed, over-geared and insolvent."[119]
It was the report's findings of alleged mismanagement under Eric Chia, however, that were the most explosive. Among other things, it alleged that the company's finances were damaged by inaccurate accounting records and by hundreds of millions of ringgit in apparently unauthorized and one-sided contracts with Malaysian and foreign companies. It also listed instances of successful and attempted alleged misappropriation of Perwaja funds, including the overseas payment of 2.89 billion yen, over which Chia was eventually charged — and cleared. The report strongly suggested that the irregularities contributed to Perwaja's financial and operational problems. In one case, Perwaja Rolling Mill & Development Sdn. Bhd., the other main operating unit, allegedly misused the proceeds of a US$196 million loan from three Japanese companies. The loan was meant for spare parts and services for the beam-and-section mill. Instead, it was "fully utilized for other purposes", such as unrelated capital expenditures and repayment of unrelated debt. As a resul
t, the new mill needed RM70 million to buy spare parts and had still to be commissioned.[120]
According to the report, between 1992 and 1995 Perwaja signed 25 maintenance contracts valued at RM292 million with local companies whose lack of experience undermined Perwaja's operations. The contracts were allegedly exorbitantly priced and permitted some contractors to purchase parts independently and bill Perwaja for them. One contractor bought RM103 million of spare parts of "questionable" quality for Perwaja Rolling Mill, "far beyond" what the company needed, but still Perwaja paid up. Another company was getting almost RM200,000 a month for gardening, cleaning and vehicle maintenance, showing "the degree of absurdity of such contracts that Perwaja had entered into".[121]
Some business arrangements with foreign contractors were equally dubious. One Japanese company was being paid commission of US$3 a tonne for iron-ore pellets and scrap purchased on world markets, when the international rate was about US$0.75. A Singapore commodity-trading outfit had been engaged to market Perwaja's direct-reduced products at a shipment price of US$112 a tonne, when the quoted market price was US$150.
The preliminary findings of the Price Waterhouse audit, which Anwar disclosed in Parliament in mid-1996, essentially confirmed the internal assessment. In what was the government's first detailed account of what went wrong, Anwar said, "The practices and the way business was carried out by the Perwaja group is [sic] very disappointing, and it is no surprise that Perwaja is facing a financial crisis." Price Waterhouse, he said, criticized Perwaja's lack of financial controls, its tendering procedures for supply and capital-investment contracts, and the absence of performance-evaluation controls for contractors. The company's board, consisting mostly of retired diplomats, civil servants and politicians, knew little of Perwaja's activities and was often left out of major financial, contracts and policy decisions. Spending and business plans apparently were never presented to the board. Large contracts were awarded without any call for tenders or any competitive bidding.[122]