Malaysian WEBS - A Lesson in Risk, and Some Recent Developments

Malaysian WEBS
A Lesson in Risk, and Some Recent Developments

By Rahul Seksaria, Assistant Editor

WEBS are not immune to political and economic turmoil. Many investors were surprised when in September of 1998 Malaysia's central bank introduced exchange controls to prevent capital from leaving the country and stabilize the exchange rate of the Malaysian ringgit (Malaysian currency). WEBS investors count on the ability to exit quickly from the market but the host government has the power to take that luxury away.

The Malaysian debacle embodies all three risks of investing abroad: currency depreciation risk, volatility of foreign markets, and the imposition of restrictions by foreign Governments.

Following the dramatic imposition of restrictions on currency flows, Webs Index Fund, Inc., the manager of the WEBS funds, temporarily suspended the issue of new shares of its Malaysia Series and express concern over its ability to honor requests to redeem WEBS Malaysia Creation Units at their NAV.

US investors were only able to cash out of their Malaysian investments in ringgits, except in the case that they had held their securities for more than one year. In that case, the ringgits could be immediately converted to dollars. Foreign investors were basically stuck with Malaysian securities and currency whether they liked it or not.

WEBS investors had already been hammered by a sharp decline in the Net Asset Value (due to plunging equity prices and the depreciating ringgit) of Malaysian WEBS . In addition to that, they could no longer sell their WEBS at a price close to the NAV since the shares were trading at a deep discount to NAV. This was mainly because:

the international community did not consider the exchange rate of 3.8 ringgits per US dollar set by the Malaysian Government to be a fair reflector of value. An exchange rate of 4.0 ringgits to the dollar (later revised to 5.07) was considered more appropriate
the restrictions on capital outflow made it uncertain as to when the ringgits would be freely convertible
speculation arose over the possibility of further restrictions

On February 4, 1999, the Malaysian Government provided some measure of relief to foreign investors. They replaced prior restrictions with a system of graduated exit levies and profit taxes ranging from 30% to zero. If your funds had been invested in Malaysia for:

less than 7 months, the levy was 30%
7 to 9 months, levy was 20%
9 months to a year, levy was 10%
more than a year, levy was zero.

Many investors have chosen to wait the full year, but it is likely that investor confidence in Malaysia will suffer for years to come.