Capital controls re-examined: the case for ‘smart’ controls

The global financial crisis which began in east Asia in 1997 is not over, neither is the inquest into its implications for adjustment policy. In the wake of this crisis, we focus here on the role of capital controls, which formed a much publicised part of the crisis-coping strategy in one country (Malaysia) and, less openly, were also deployed by other crisis-afflicted countries. Evaluation so far has examined different target variables with different estimation methods, generally concentrating on efficiency and stability indicators and ignoring equity measures; it has also typically treated `control´ as a one-zero dummy variable, ignoring the `quality´ of intervention and in particular the extent to which efficiency gains are obtained in exchange for controls. Partly because of these limitations, the literature has reached no consensus on the impact of controls, nor therefore about where they fit within the set of post-crisis defence mechanisms. We propose an approach in which the government plays off short-term political security against long-term economic gain; the more insecure its political footing, the greater the weight it gives to political survival, which is likely to increase the probability of controls being imposed. The modelling of this approach generates a governmental `policy reaction function´ and an impact function for controls, which are estimated by simultaneous panel-data methods across a sample of thirty developing and transitional countries between 1980-2003, using, for the period since 1996, the `new´ IMF dataset which differentiates between controls by type. We find that controls appear to cause increases in income equality, and are significantly associated with political insecurity and relatively low levels of openness to trade. They do not, in our analysis, materially influence the level of whole-economy productivity or GDP across the sample of countries examined, although they do influence productivity in particular sectors, in particular manufacturing. But the dispersion around this central finding is wide: the tendency for controls to depress productivity by encouraging rent-seeking sometimes is, and sometimes is not, counteracted by purposive government policy actions to maintain competitiveness. Whether or not this happens – whether, as we put it, controls are `smart´, and the manner in which they are smartened - is vital, on both efficiency and equity grounds. We devise a formula for, and make the case for capital controls which are time-limited, and contain an inbuilt incentive to increased productivity, as a means of improving the sustainability and equity of the adjustment process whilst keeping to a minimum the cost in terms of productive efficiency

Building an Early Warning Towards the Resilience of Islamic Banking in Indonesia

An early warning system (EWS) is widely used as surveillance mechanism for preserving financial system stability. This paper addresses the issue of namely which macroeconomic indicators that are capable of signaling adverse shocks towards the resilience of Islamic banking in Indonesia. This research uses an extraction signal approach as EWS mechanism. The results suggest that there are several indicators that (1) IBRI, which is composed from standardized deposit and financing, is able to figure out the resilience of Islamic banking. The resilience of Islamic banking was considered stable since the index was moving below the normal line during the global financial crises, and (2) Some selected macro financial indicators, M2/reserve (M2res), credit growth (CG), real effective exchange rate (REER), and inflation rate (INF) empirically show low noise to signal ratio. It means that these four variables are capable of signaling vulnerabilities due to adverse external shocks. The paper recommends that the resilience of Islamic banking needs to be supported by the resilience in the real sector.DOI: 10.15408/aiq.v9i1.388

Information content and informativeness of the analyst report in Malaysia

Purpose: This paper aims to investigate the value of information content and informativeness of the analyst report for Sharīʿah-compliant shares in Malaysia. Design/methodology/approach: The authors use a sample of 657 daily published analyst reports on Sharīʿah-compliant shares from 2010 to 2015, which were downloaded from Bursa Malaysia’s repository system. The method was quantitative in nature and panel regression analysis was used. Diagnostics tests including the variance inflation factor, correlation analysis, heteroskedasticity test, serial auto-correlation and the Hausman test were performed to ensure validity and reliability of data. The significance of the variables indicated whether the analyst reports contained valuable information on Shariah compliancy. Findings:Results obtained from the FEM-Robust model revealed that the R2 value was equivalent to 0.79 per cent, suggesting that the power of return explained by the information content and informativeness was less for Sharīʿah-compliant shares. The F-statistics were statistically significant for all models, postulating that the data used were reliable and fit for the purpose of analysis. The findings showed that the information content of target price and earnings forecasts significantly influenced the returns of Sharīʿah-compliant shares. In terms of informativeness, return on equity, sales to price ratio and cash flow to price were associated with the returns of the shares. Practical implications: The outcome from this finding confirmed that the analyst report retained its position as a good source of reference when making investment decisions. However, the disclosure of information in the form of qualitative information together with fundamental information should be enhanced for Sharīʿah-compliant share so that investors would have adequate information when making an investment decision. Originality/value: This study will supply more insights into the matter of information content and informativeness of the analyst report in Malaysia by focussing on Sharīʿah-compliant shares, which is practically an underexplored research area in Malaysia

Predicting the Global Crisis Recovery Period: Lessons from the 1997 Crisis

The objective of this paper is to identify the best indicator in forecasting the recovery period from the current global crisis for Malaysia. Initially, to determine the best indicator for the recovery period, we construct a simple forecasting model that incorporates three indicators: lagging, leading and coincidence indices, with two proxies of economic performance, macroeconomic and financial variables. We estimate a two-variable vector error correction model (VECM) using monthly and quarterly data covering the period 1980 to 2000. We alternate between the three indicators and we evaluate each model using out-of-sample forecast. Using the results of the initial process of analysis, we predict the recovery period of Malaysian economy from the current global economic crisis. It is found that lagging index is the best indicator of financial performance of the economy. From the half-life calculation base on error correction term, the study found that Malaysia was able to recover from the previous 1997 crisis within a two to four year period after the crisis. Given that the current crisis environment is similar to the previous 1997 crisis, a similar time period could apply to the current global crisis recovery.Indicator, forecasting, crisis, recovery, Malaysia,