This article first appeared in The Edge Financial Daily on September 7, 2017 - September 13, 2017

PUTRAJAYA: Former second finance minister Tan Sri Nor Mohamed Yakcop, who was adviser to Bank Negara Malaysia (BNM) from September 1998 to April 2000, said he made a mistake of hedging 100% against currencies in the 1990s.

“I was paid to do the job. I could have said why should I take the risk for my own career or family, but I did it for the bank and the country,” he told a five-man panel  of the Royal Commission of Inquiry (RCI) into the 1990s foreign exchange (forex) losses scandal yesterday.

The former BNM banking department manager between 1986 and 1994, who was responsible for external reserves management, took the stand to answer questions regarding his role in the forex scandal, which is estimated to incur losses of RM32.07 billion from 1988 to 1994.

Nor Mohamed said in the late 1980s and early 1990s, there was a large inflow of US dollars, the stock market was booming and in terms of market valuation, Malaysia was among the highest in the world.

“High-ticket industries were being set up and US dollars were coming in, but at that time the US dollar was weakening because there was talk of the ‘Fortress Euro’ — a concept that various European nations were doing well after the Second World War.

“It was said that Europe including the UK would overtake the US as the strongest economy in the world. We subscribed to this view and bought European currencies including pound sterling,” he said.

Unfortunately, the value of the European currencies crashed after the non-ratification of the Maastricht Treaty by Denmark in February 1992, he added.

RCI conducting officer Datuk Suhaimi Ibrahim pointed out to Nor Mohamed that excessive speculative management of the banking department then was to convert an estimated US$30 billion into reserves, but what came in was about half.

To a question whether the hedging was purely speculative, Nor Mohamed said: “Let’s say, we knew this money [US dollars] was coming in over a period of a few months, and I was the manager of the department, and I knew about it two or three months earlier.”

“If I did not hedge it by the time the money came in, we would be buying Deutsche Mark at an expensive rate. Then the bank and everyone would accuse me of not hedging.

“Anyway, now I am clearly wrong [for hedging], but at that time if I didn’t hedge and the US dollar crashed, I would be accused of not executing my responsibility as the manager. It was part of my job to hedge,” he added.

He explained that the Plaza Accord in 1985 caused the yen to strengthen against the US dollar sharply, which resulted in losses to Malaysia and developing countries as a significant portion of external borrowings were denominated in yen.

Seeing this, former BNM governor Tan Sri Jaffar Hussein mooted the idea of starting the active external reserves management (which came under the banking department) in 1988.

“Jaffar’s primary motive for external reserves management was to mitigate the downside impact of major changes in forex rates on Malaysia’s foreign currency assets and liabilities, and to preserve and conserve the value of what we have,” he said.

Nor Mohamed noted that he reported to Jaffar and a separate external reserves committee, and not to the finance minister and prime minister as that was not his reporting line.

He added that he was not involved in deciding on the accounting treatment of the losses and had no knowledge whatsoever of the accounting treatment.

Nor Mohamed said it is easy now to look back and think on hindsight of how the losses could have been avoided but he was merely doing his job then.

“I did not say we did everything right. We did wrong and suffered quietly, but the intention or mindset was to be fair [in doing my job] and that we must learn from our mistakes,” he said.

“All external reserve activities including forex activities were based on strategic considerations. Admittedly, we misread the turn of the market [the European currencies crash] … we learnt a bitter lesson from these incidents,” he said.

“The forex losses happened. There is no denying it. There is also no denying my accountability for the forex losses. I accepted my fair share of the accountability for the forex losses and resigned from BNM. At that time, it appeared to me to be a sad end to my 25 years of service to the nation, through BNM,” he said.

Read Nor Mohamed’s full written statement at the RCI hearing at www.theedgemarkets.com.