Recalling Bank Negara’s massive forex losses By: Ho Kay Tat

SINGAPORE (March 24): The government is moving ahead to investigate whether there were any wrongdoings in the massive foreign exchange losses suffered by Bank Negara some 25 years ago. Many people today may not have a good recollection of what happened, while many others probably had no knowledge of it until it became news again recently as the sitting government took aim at this nasty episode under Tun Dr Mahathir Mohamad’s rule.

I was a reporter with Reuters then and had covered the losses that surfaced when the central bank released its annual reports for 1992 and 1993 in March 1993 and March 1994, respectively. I recall that those losses first puzzled me and others because bank officials did not come forward to talk about them at the press conference nor was the information contained in the press release. They were, however, disclosed in the last few pages of the 1992 report on the bank’s financial statement, which normally do not attract attention, as reporters would focus on the earlier parts that touched on the performance of the economy and banking sector.

But that year, we took a cursory look at those back pages and spotted something odd. Bank Negara’s financial statement showed its Other Reserves had plunged from RM10.1 billion in 1991 to RM743 million in 1992, or a loss of RM9.3 billion. There was also a Contingent Liability of RM2.7 billion.

When we asked about this, I recall that both then Bank Negara governor, the late Tan Sri Jaafar Hussein, and his deputy, Tan Sri Dr Lin See Yan, said it was nothing serious, as they were mere paper losses that could be recovered later. We were not convinced, but we were unable to challenge them, as we did not under stand the manner in which Bank Negara presented its accounts.

The next day, however, the market was abuzz with talk that the bank had lost billions in foreign exchange transactions and I remember writing stories on this for the next week or so. But nothing more came of it, although opposition MPs led by Lim Kit Siang continued to press the Ministry of Finance and Bank Negara for answers.

The matter really blew up a year later when Bank Negara tabled its 1993 report and disclosed another forex loss of RM5.7 billion. Here is what Jaafar said:

“In the Bank’s 1993 accounts, a net deficiency in foreign exchange transactions of RM5.7 billion is reported, an amount which will be written off against the Bank’s future profits. This loss reflected errors in judgment involving commitments made with the best intentions to protect the national interest prior to the publication of the Bank’s 1992 accounts towards the end of March 1993. As these forward transactions were unwound, losses unfolded in the course of 1993. In this regard, global developments over the past year had not been easy for the Bank; indeed, they made it increasingly difficult for the Bank to unwind these positions without some losses. For the most part, time was not on the Bank’s side. Nevertheless, this exercise is now complete — there is at this time no more contingent liabi lity on the Bank’s forward foreign exchange transactions on this account. An unfortunate chapter in the Bank’s history is now closed.”

Jaafar took responsibility for what happened and resigned, as did the bank official directly responsible for its foreign exchange operations, Tan Sri Nor Mohamed Yakcop.

How did Bank Negara lose the billions?

Jaafar said the losses were owing to commitments made to protect the nation’s interests. He was referring to the bank’s operations in the global forex market to manage the country’s foreign reserves and, obviously, something went wrong in a big way.

Forex traders and journalists who covered financial markets in the late 1980s knew that Bank Negara had a reputation for taking aggressive positions to influence the value of the ringgit against the major currencies. When the bank is not happy with the direction of the ringgit, up or down, it makes its intentions known by either selling or buying ringgit.

One question I had always asked forex dealers when writing market reports for Reuters was, “Is Negara in the market today?”

Bank Negara has always maintained that its market operations were to prevent volatility and undue speculation. Its critics, on the other hand, said it also did so for profits, which it enjoyed for years.

What went wrong in 1992?

That was the year George Soros and other hedge funds bet heavily against the British pound on the basis that it was overvalued. The Bank of England (BOE) fought back by buying billions of sterling while Soros and gang shorted the battered currency.

As it did not want to deplete too much of its reserves to defend the fixed rate of the pound within the European Exchange Rate Mechanism, BOE capitulated by withdrawing from the ERM on Sept 16, 1992, since called Black Wednesday.

It was widely believed then that Bank Negara had bet on the wrong side of the fight between BOE and the hedge funds. It never thought that central banks could lose against specu lators, but BOE lost and Soros was said to have pocketed at least US$1 billion.

Bank Negara has never confirmed nor denied that this was indeed what happened but the evidence, although circumstantial, points to this as the reason for the loss of RM9.3 billion in its 1992 accounts and the subse quent loss of another RM5.7 billion in 1993, bringing its total loss to RM15 billion.

Was the loss more than RM15 bil?

Former Bank Negara assistant governor Datuk Abdul Murad Khalid was reported as saying recently that the losses were actually US$10 billion. That would work out to RM25 billion at the then exchange rate of RM2.50 to a dollar. Murad also alleged that there were no proper investigations into the matter.

Following his allegations, the Cabinet has now set up a task force led by former chief secretary to the government, Tan Sri Sidek Hassan, to investigate whether there were wrongdoings that caused the losses, whether there was a cover-up on the size of the losses, and whether Parliament was misled.

So, who should the task force call up as part of its probe? I am guessing the following:

Tun Mahathir, who was the prime minister then;

Tun Daim Zainuddin, who was the minister of finance from 1984 to 1991 when Bank Negara was active in the forex market;

Datuk Seri Anwar Ibrahim, who was the minister of finance when the losses surfaced in 1992 and 1993;

Dr Lin, who was deputy governor of the central bank then;

Tan Sri Ahmad Don, who succeeded Jaafar as governor;

Murad, who made the allegations; and

Nor Mohamed, who was head of forex operations.

Who is Nor Mohamed?

Nor Mohamed is the man who lost billions for Bank Negara and resigned along with Jaafar in 1993. He then kept a low profile with short spells at RHB Research Institute and Mun Loong Bhd.

In an ironic twist, the man who lost billions for the country was later credited with helping save the ringgit from currency speculators in 1998.

Frustrated by the year-long failure of governments and central banks to fight off speculators, who had devalued Asian currencies (the ringgit plunged to as low as 4.80 to the dollar), Tun Mahathir turned to Nor Mohamed for help. The doctor did not understand how the currency market worked and Nor Mohamed took him through it in great detail. The two men then confidentially devised the plan that shocked the world — the imposition of controls on Sept 1, 1998.

Widely criticised at the time (Ahmad Don and his deputy Datuk Fong Weng Phak resigned in protest), some now say the move helped bring an end to the crisis, as speculators feared other affected countries would do the same.

Nor Mohamed’s star shone again and he later became Minister of Finance 2 under Tun Mahathir and Tun Abdullah Ahmad Badawi. He is now deputy chairman of Khazanah Nasional.

But now, a ghost from his past has been dug up as fodder for the political contest between Prime Minister Datuk Seri Najib Razak and his biggest nemesis, Tun Mahathir. The objective is obvious. Tun Mahathir has attacked Najib incessantly over 1Malaysia Development Bhd. The current administration is fighting back by saying billions were also lost under Tun Mahathir’s watch. Tun Mahathir says there is a 1MDB cover-up and his foes are accusing him of doing the same.

Will the task force unearth anything that is not already known?

The task force needs three months to complete its work, so we will just have to wait for the full picture before we can come to any conclusion that can bring closure to something that happened 25 years ago.

Perhaps, one day, we will be lucky enough to also have the full picture of the affairs of 1MDB. Current Minister of Finance 2 Datuk Seri Johari Abdul Ghani did say this month that no action had been taken against anyone in Malaysia over 1MDB because we have only “half the story” so far.

In that case, should we not have a task force on 1MDB as well so Malaysians can have the full picture?

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Ho Kay Tat is publisher and group CEO of The Edge Media Group

This article appears in Issue 772 (March 27) of The Edge Singapore.

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