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Friday, 21 August 2015

What goes up fast can come down fast but this is not 1998 all over again

Many people ask me why this year, the Ringgit is the worst performing currency in Asia and why we have lots of capital outflow this year.

That's because the Ringgit was the best performing currency in Asia for the 2009-2010 and we had record capital inflows then.

Many people forget the above.

At that time, the USA was in recession and started pumping money into their economy causing interest rates there to drop close to zero - hence capital left their country and started looking for places to invest in for better yield.

Also at the same time, global oil prices rose to record levels and the foreign investors perceive Malaysia, being one of the only significant energy exporter in Asia to benefit from this.

Have a look at our FOREX reserves -in particular the years 2009-2011 where our reserve sjumped and you will get a good idea of the capital inflows during that year when our Bank Negara tried to intervene by buying USD to prevent our Ringgit from appreciating too fast - which then builds up the FOREX reserves.

Now, the reverse has become true. The USA is about to raise their interest rates and oil prices have plunged to multi-year lows.

And to make it worse, this time around, China's economy is at risk and they have started to devalue their currency - causing uncertainty to countries who export the most to China.

It's a simple case of what goes up fast can come down fast - especially if situation turns against you quickly
The current weakness has very little to do with corruption or weakness. If not, the Denmark, New Zealand and Norway currencies would not have plunged as much or worse than our Ringgit since they are among the top 3 most corrupt-free countries in the world.

Denmark and New Zealand are ranked number one and two least corrupt in the world in 2014 by Transparency International 
Norway is also high up in terms of corruption ranking but being heavily dependent on oil exports, it is being affected badly by the drop in oil prices and have fallen as bad as Malaysia, if not worse.

Do the political troubles affect Malaysia?

Yes. Mostly because investors typically do not welcome a sudden change of leadership as such changes normally means a change in policies.

Investors do not like uncertainty.

The best way to eliminate this uncertainty is not to change PM suddenly and uncdemocratically but to ask those to wait for General Elections in 2018 and allow the current PM Najib government to implement policies or stimulus packages that can help settle the economic uncertainties, solve problems and stimulate growth.

Ask the old man and the noisy opposition (who have been saying Malaysia is a failed state and is going bankrupt since 40 years ago) to stop with their nonsense right now, wait for 2018 and rally behind government plans to focus on the economy.  That will help.

Excessive politicking and endless daily rhetoric does not put food on our tables and does not grow or stabilize our economy.

Changing Prime Minister right now does not solve China's weakening economy, increase global oil prices nor stop the USA from increasing interest rates.

However the political troubles is not the main cause of the weakening. It is the macro-economic realities mentioned above that are the main causes.

It is important to note that out of 180 countries in the world, only 14 countries have not depreciated against the USD - and these include many countries that have pegged their currency with the USD.

Is the situation today the same as in 1997-1998?

Hardly, the same. Our economy is still strong.

I don't get why some people are mocking the govt that the Ringgit has fallen against the USD and is now wirse than the previous peg at RM3.80.

All Najib has to do is to do a Mahathir and peg the Ringgit at RM3.80.

Habis cerita. End of story. That is the easiest thing to do. 

When Mahathir pegged the RM at 3,80 in 1998, the rate was as low as USD1=RM4.88 (reached on 7th Jan 1998- ) and not RM4.00

Or people forget easily?

However, it is good to see that the govt has resisted this easy way out and preserve free capital flows which better reflects prevailing market conditions.

Pegging the Ringgit is the wrong way to go and will cause more harm than good.

Remember that it is not just the Ringgit that is affected and pretty much the entire world that has weakened against the USD- this a strong Ringgit compared to our competitors whose currency has similarly weakened will hurt us.

The surprise and sudden devaluation of the Chinese Yuan certainly sent shockwaves globally.

At the current rate, the Ringgit has actually performed better over the past 5 years than many large countries - especially the commodity exporters. Here is a table

And no. This is not 1998 all over again. See chart.

The weakening of the ringgit does not reflect the country’s current economic fundamentals which remains strong, says Minister Abdul Wahid Omar.

He said the local banking system is sound, economic activities are still intact to drive economic growth and the country is on track to achieve a Gross Domestic Product growth of between 4.5% and 5.5% this year.

“Back in 1997 and 1998 (during the Asian financial crisis), we were hit very badly,” he said, adding that many factors affected Malaysia then, including a trade deficit, reserves falling below US$30 billion (RM117.1 billion) and a very high debt level among companies with some exposed to foreign currency borrowings.

Company debt levels are much lower today with less exposure to foreign currency denominated borrowings due to strict BNM controls as well as lessons learned from the past.

“Our current position has improved tremendously, where we have recorded consistent trade surplus, our reserves is more than three times larger now and our corporate debt level is much lower,”

 Today is indeed completely different from 1998 as this article further explains

Contrary to the opinion of many that the country is on the verge of an economic collapse due to the weaker ringgit, independent macro-economic analyst, Professor Dr Hoo Ke Ping said that such negative sentiment was not based on facts. 
Hoo substantiated his views by presenting several points to prove that the current ringgit depreciation is actually not the same as experienced during the 1997-98 Asian Financial Crisis, which then had affected Malaysia and and other emerging economies in the region. 
“One of the ways to determine how bad our economy is doing is by comparing its current performance with the worst period we have ever performed. 
“So in comparison with what we endured during the 1997-98 Asian Financial Crisis, this is just a minor economic setback. 
“Mind you that in 1998, our market share collapsed, it was cut down to more than 70 per cent whereas currently it is only down to 15 per cent. 
“Also, at that time our foreign debt is approximately US$160 billion and we only have around US$ 20 billion reserve…now our total foreign borrowing is not even US$ 35 billion while our reserve is at best, US$ 99 billion,” said Hoo. 
In terms of domestic debt, Hoo explained that while our current debt is relatively high but it is still less than 100 per cent to our gross domestic product (GDP) ratio whereas in 1998 such debt had easily exceeded 158 to 200 per cent to GDP. 
Hoo also clarified that there is no reason for Malaysians to panic because the current currency depreciation has not escalated into a regional crisis. 
“Unlike now, in 1998 there was a huge regional crisis. Several countries almost went into bankruptcy they are South Korea, Thailand, Indonesia and even Hong Kong which was known at that time for having a good economic governance. 
“Even Japan too almost went bankrupt in June 1998…so back to the present situation, do you see any other countries within our region that is facing bankruptcy? No. 
“So if there is no regional crisis implicating us and our neighbours, there is actually no reason for us to panic. Despite the odds, our economy is still strong,” he said.

Yes, very different.

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