Forex scandal: A rebuttal to Johari Ghani

By Tariq Ismail

I’ve been following the exchange between Datuk Johari Ghani and Tun Dr Mahathir Mohamad with much interest and a hint of amusement at this latest rebuttal by Johari.

Admittedly, foreign exchange and reserves management is a very technical subject, especially given Bank Negara Malaysia’s (BNM) role. So let me break down the real issue at hand, so that we might put the events of 1992-1993 and 2013-2015 in their proper perspective and compare them to better judge between right and wrong.

Managing the country’s reserves has almost always been largely synonymous with managing our foreign exchange reserves.

For the layman’s benefit, foreign exchange reserves are accumulated in the capital account of the balance of payments when we receive foreign currency for export of our goods and services overseas. Theoretically, the value of our exports and imports should equal the value of our foreign exchange earnings plus other financial instruments and other reserves such as gold.

Therefore, when the ringgit value suddenly increases or drops, this causes an imbalance of payment due to timing between delivery of goods and payment for the goods, which is contracted at the earlier rate. However, the value of the ringgit is determined not just by economic trade value but more so by external factors such as speculative activities and global investment activities.

Because of this, central banks like BNM typically have an in-house foreign exchange department in charge of trading in foreign currency forward contracts, in anticipation of the future value of the currency given the expected economic activities of the nation as a whole.

This is where I disagree with Datuk the most – the entire foreign exchange trading operation in itself is “anticipatory” and requires strong risk management governance practices and controls. The difference between what is “orderly” and what is “gambling” lies first in the risk parameters set by the BNM senior management endorsed by its board, and second, in the risk event probability and severity causing any loss.

Going back to Datuk’s contention that the 1992-1993 forex event exceeded risk parameters such that it is considered gambling, I would like to point out the circumstances pointing to the heightened risk of the time, which Datuk has conveniently excluded from his rebuttal.

Datuk pointed out from the statement in the internal audit report in 1994 that the monthly average in maturing buy and sell forex transactions increased to RM750 billion a month in 1993 from RM140 billion in 1992.

Yet Datuk conveniently forgets that 1993 saw the extended super bull run on the KLSE which saw total turnover increase dramatically from RM51 billion in 1992 to over RM380 billion in 1993, mostly attributed to foreign institutional funds. Risk parameters would have taken this trend into account when determining appropriate levels of foreign exchange reserves, even by today’s standards.

On a similar note, simply aggregating the total buy and sell forex trades without accounting for speculation by outside parties during a period of extremely high growth in the country (and during a time when hedging was in its infancy), simply means the risk probability of speculative activities, upon which the decision was made 34 years ago, has not been taken into account in levelling accusations against the team then.

And in yet another instance of poor risk assessment by Datuk and those involved in the accusations concerning the 1992-1993 loss, the loss event on Black Wednesday in September 1992 was in itself a one-in-30-years risk event by today’s standards, whereby losses are virtually guaranteed and risk mitigation decisions would typically be drawn up to either totally avoid the risk event or else simply cut losses.

It was a risk event that was unforeseen and carried huge inherent risks whereby even had we not participated in the market, we would have made losses. Up till that point, no losses were made in the trading operations despite the risky trades involved. It is a credit to the leaders of the time that mitigating measures could be taken to minimise the losses.

Now, let’s compare this with Datuk’s contention that the reduction in reserves of 2013-2015 was despite “orderly” forex trading and not speculation or “gambling” as it was 34 years ago.

I would like to point out to Datuk that since he contends the events causing the outflows of the ringgit were anticipated, then by risk terms they were risk events occurring once or several times a year at least, hence they were foreseeable threats.

Risk mitigation actions should have been in place from 2013 itself and the situation should have been addressed so that no losses were incurred at all, let alone over three years. Compare this to the single loss event in 1992. Which do you think speaks of failure to manage risk? Which do you think points to ensuring “orderly condition of the foreign exchange market” and which to gambling?

Datuk and his team would do well to frame their arguments in risk management terms, because this is the crux of the matter. You see, 34 years ago, risk management practices were in their infancy even by global standards. Best practices for forex trading particularly did not appear until later in the 90s, and have only evolved tremendously in the past decade or so. Comparing the rules and laws then with what they are now as a basis of judgment for what is orderly condition of the market is mean spirited, to say the least.

Rather, Datuk and his team should explain and disclose to the public, as they did against Tun, the aggregate of buy and sell forex trades between 2013-2015 for a fairer comparison of the two risk events. Simply quoting the reduction in value of capital reserves is not tantamount to disclosing the operating loss, if any, arising from the assault on the ringgit in these three years in question. I hope Datuk is man enough to be transparent about this.

For the Malaysian public, what is important to remember here is that in risk management terms, a loss is not in and of itself a symptom of poor risk management, let alone indicative of speculation and gambling. Poor risk management is simply the inability to effectively manage risks as and when they arise. This was Tun’s point. We deserve leaders who know this difference.

Tariq Ismail is a member of PPBM supreme council. -FMT