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AUGUST 18 , 2000 VOL. 26 NO. 32 | SEARCH ASIAWEEK Business Buzz Pressure from the top By ARJUNA RANAWANA Welcome to Kuala Lumpur — a.k.a. Squeeze City. In case you've forgotten, the way banks are supposed to make money is to pay depositors interest on their savings while charging borrowers a higher rate. But on Aug. 4, when Malaysia's central bank - Bank Negara Malaysia — raised interest rates on deposits by an annual 0.25%, it also reminded banks that they are not allowed to raise the rate on money they lend. The inter-bank rate remains fixed at a yearly 5.5%. Result: Shares linked to banks took an immediate dive and brokers advised investors to sell unless they are ready to hold on for the long-term. Malaysia's banks, in post-Crisis trouble in 1998, bounced back last year after the government took over their non-performing loans. He who accepts a favor finds himself in debt, as they say. With banks owing their lives to the government, what can they do? "It seems that the authorities think the banks which are making money can take a haircut," a senior bank official complained. Scissors, please. The increase in deposit returns — however small — is slightly good news for retirees and others living on interest-generated income. Rates for long-term deposits were fixed at around 4% after capital controls were imposed in September 1998, so these folk had seen their incomes slowly erode since then. One way for them to increase their return on investment was to start playing the K.L. stock market — an attractive risk only for the bravest. Another, but illegal, way? There has been a steady flow of smaller accounts leaving Malaysia seeking better interest rates abroad. The Aug. 4 increase, one banker explained, "is to stop more money leaving the country." This sort of rate squeeze could push up inflation and with the ringgit pegged to the dollar (at 3.8) and capital controls in place inflation is a threat. Even with Malaysia posting positive growth figures, officials predict inflation (which hits small investors hardest) could rise to 2.5% this year from about 1.4% last year (independent sources predict a 3.5% rise). A quarter of a percentage point isn't much, but every little bit counts. Write to Asiaweek at mail@web.asiaweek.com
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