Mahathir gambled away Bank Negara’s foreign reserves

Dato’ Eric See-To

For Tun Mahathir to try and defend his RM31.5 billion (worth RM100 billion now) Bank Negara (BNM) Forex scandal by claiming that PM Najib had lost RM160 billion in Forex reserves between 2013 and 2016 is an utterly irresponsible and desperate attempt.

There is a big difference between illegal gambling and the normal function of BNM in managing currency volatility.

Many people do not understand how central banks like BNM accumulates Forex reserves.

When the Ringgit is under sustained buying and is moving too fast up, the BNM tries to moderate the movement by using Ringgit to buy USD. This increases supply of Ringgit and hence moderates the sharp upward movement of the Ringgit’s rate against the USD. When BNM does this, they accumulate USD and our USD Forex reserves grow.

Correspondingly, when the Ringgit is under sustained selling as investors wants to move their money back out of Malaysia like what happened in late 2013 when the USA signaled that they will start increasing their interest rates. BNM will then sell their previously accumulated USD reserves in order to stop the Ringgit from falling too sharply.

In fact, this spot buying or selling is BNM doing it’s job and this is the purpose of having forex reserves in the first place.

When the BNM sells USD for this purpose, NO MONEY IS LOST as BNM gets paid in Ringgit for the sale of the USD.

Yes, our forex reserves dropped during this period but we got it back in Ringgit.

That is why BNM reported substantial profits for the year 2014 (RM6.4 billion), 2015 (RM7.8 billion) and 2016 (RM6.5 billion).

In Tun Mahathir’s BNM scandal’s case, BNM went beyond what they were supposed to do.

They gambled on forex futures using our reserves instead of spot buying or selling.

They leveraged (like using share margin financing) to bet whether a certain currency would go up or down. The leverage was huge and exposed Malaysia to 5 times our reserves or 3 times our GDP – which meant that their illegal gambling could have bankrupted Malaysia 3 times over.

When you gamble like this and lose, you lose the reserves outright and do not get back any Ringgit – unlike between 2013 to 2016.

In fact, the losses were so great that BNM was made technically insolvent in 1994 and had to resort to sell off their shares in MAS, Telekom and Tenaga to partly cover the losses.

As the RCI report stated, these losses were also hidden using “unconventional accounting treatments”, such as booking losses to reserves in the balance sheet and the absorption of the remaining losses by the transfer of shares from the Government to BNM as well as the creation of a “Deferred Expenditure” to be repaid in installments over a decade.

To make it worse, the RCI said that to allow this gambling in the first place is illegal and that after they had made losses, there was a deliberate attempt to cover up and mislead the cabinet and parliament.

Whether anyone benefited from these staggering (and illegal) losses is still under investigations and we shall leave it to the police to find out.

But for Tun Mahathir to even try to relate the actual losses in his BNM Forex Scandal with our forex reducing between 2013 to 2016 period as a result of BNM carrying out its duty is utterly astounding!

Perhaps Tun Mahathir may not realize that during the same period between 2013 and 2016, China’s forex reserves also declined by USD800 billion (RM3.2 trillion) for the very same reason Malaysia’s forex reserves reduced?

Source: Eric See-To.

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