The Malaysian Ringgit’s Slide


June 11, 2015

The Malaysian Ringgit’s Slide tells the story of Malaysia’s Political Mess

Story by G. Sharmila

ringgit-slide

The weakening ringgit appears to have investors scared, with the currency hitting a 9-year low of 3.77 against the US dollar on Monday. But are investor concerns warranted, or simply overdone? Tiger examines the matter in greater detail.

On Monday, the ringgit hit a 9-year low, the lowest level since January 2006, according to a Bloomberg report on the same day. Yesterday, the ringgit closed at 3.7525 against the US dollar, with some analysts reportedly saying this was merely a technical correction. Additionally, data from Bloomberg showed that the ringgit had fallen to as low as 3.76 to the US dollar.

READ THIS:

http://www.kinibiz.com/story/markets/171739/ringgit-slumps-to-a-9-year-low.html?utm_source=newsletter1&utm_medium=email&utm_campaign=kinibiz-newsletter

Market talk says that the ringgit would break the 3.8 level today. At the time of writing, this hasn’t happened yet and Tiger doesn’t think it will last even if it does. Even if it does, it is not a disaster unless there are fundamental reasons for the ringgit weakness. In the long-term, the currency performance is tied to economic fundamentals, and the fundamentals are still strong.

In fact soon after the Bloomberg report, there was another one from the same agency which said that the ringgit was the best performing currency in the immediately preceding two weeks! That simply indicates how volatile conditions are in the currency market now.

US Federal Reserve

An economist Tiger spoke to said that increased volatility and downward pressure on the ringgit is expected preceding the meeting by the US Federal Reserve next week. Other economists have noted in previous media reports that investors have been selling the ringgit in anticipation of an increase in interest rates by the Fed, which could very well be true as interest rates do tend to influence currency movements.

It is also worth remembering that the ringgit is a managed float currency, which means that its exchange rate is allowed to appreciate and conversely, depreciate against other currencies according to market conditions. With a managed float currency, the central bank intervenes when necessary to stabilise the currency. As the economist pointed out to Tiger, it is not unusual for the current weak condition of the ringgit as the greenback has also been strengthening against other currencies of late.

There are also other short-term concerns such as uncertainty over 1Malaysia Development Bhd or 1MDB but this would have already been pretty much discounted and is probably already in the equation unless there are unexpected developments here. Also, the issue has taken a political dimension with pressure on the prime minister to step down which adds to uncertainty.

Meantime, there is the overhang of a possible downgrade on Malaysia’s sovereign rating by international rating agency Fitch which has said that there is even chance of it downgrading Malaysia. Again this has been in the market for a while and is possibly discounted.

But back to economic fundamentals. Economists have pointed out that the country’s 2015 gross domestic product forecast of 5.5% is healthy and that investor reactions towards falling crude oil prices have already been priced in. In fact the subsequent recovery from the earlier huge fall in oil prices was said to be positive for the ringgit as it will reduce pressures on the trade account. They have said that the investor selldown of the ringgit has been sentiment-driven as opposed to motivated by a drastic change in fundamentals.

According to a forex strategist from AmBank, the ringgit is falling due to positive economic data from the US and timing over the hiking of interest rates there following the easing of liquidity injection there. He also said that “increasing political noise over the sensational development in 1MDB, risk of fiscal slippage and threat of a sovereign rating downgrade by Fitch Ratings have caused the sell-off of the ringgit as well.”

To illustrate the strength of the fundamentals, let’s take a look at Bank Negara Malaysia (BNM)’s foreign exchange reserves. When forex reserves decrease, it signifies an outflow of funds. If you look at the graph below, the country’s forex reserves have been on the rise from 1997 to 2013, except for dips during the 1997/1998 Asian financial crisis and the 2007-2009 period, which coincides with the global financial crisis.

International-reserves-at-BNM

In fact, data from the BNM website show that the forex reserves as of May 29th this year are RM394.3 billion, unchanged from the RM393.4 billion in the fourth quarter of 2014. As economists have noted in the past, the amount of forex reserves is sufficient to absorb foreign outflows in the short-term and since the country’s current account remains in surplus, there’s every chance that the experts are right about the ringgit selldown being sentiment-driven.

The current account is the balance of trade between a country and its trading partners, including all payments between countries for goods, services, interest and dividends. A current account surplus is a positive thing for the long-term outlook for the ringgit because it implies that a country is a large exporter and has a positive balance from inflows and outflows of trade and service.

The balance of payment includes the current account plus outflows of capital, both long-term and short-term. What is happening right now is that short-term portfolio outflows have been high in recent weeks. These outflows tend to weaken the ringgit because ringgit funds are converted,  into other currencies, mainly the US dollar. But unless the outflows are sustained, the pressure on the ringgit eases off after some time.

BNM data show that the current account balance was RM9.968 billion for the first quarter of this year, versus RM5.666 billion for the immediately preceding quarter – the last quarter of 2014. That indicates that the trade and services account has actually done better during the period, recording a surplus which is substantially higher.

What’s happening with the ringgit now is essentially volatility, due to the factors mentioned above and this too, shall pass. Experts have said that the volatility is short-term due to portfolio outflows, hence once sentiment improves and outflows normalise, the fundamentals shall prevail.

But until the interest rate position in the US becomes clearer, one should expect volatility of not only the ringgit but all other currencies as well in the coming months. That does not necessarily indicate a fundamental change in the economic position.

22 thoughts on “The Malaysian Ringgit’s Slide

  1. The ringgit’s decline against the US dollar is expected to continue in the coming months. Its next resistance point is RM4 to the US dollar. There is no confidence in the Najib administration’s management of the economy. 1MDB is a complete mess. –Din Merican

  2. There is a lot of “noise” in FX movements in the short-term. So for “fundamental” analysis there is little point in looking at movements over a few days or even a few weeks.

    From a global perspective, the ringgit has not done especially badly to be fair. Major non-Asian EM currencies such as the Brazil real, South African rand and Mexico peso have done worse than the ringgit over the past few years. I can understand why Malaysians may be concerned, but FX professionals outside Malaysia do not see any reason to be hysterical about the ringgit’s slide from a global perspective.

    Nonetheless, there is a clear weakening trend in MYR. Over the course of this year thus far, MYR was been among the weakest Asian currencies. This is also true over the course of the past 12 months or even the past 24 months.

    The yen has been falling sharply too over the past 1-2 years, but that is primarily the result of a policy move by Japan in order to boost the economy. The ringgit’s slide on the other hand does not appear to have been engineered by the Malaysian government.

    Malaysia’s current account balance has been sliding steadily since mid-2009, though it is still positive. The CA balances for Thailand, Singapore and Philippines, on the other hand has been roughly stable (and positive) over the past 5 years or so, while those for Taiwan and Korea have actually been rising. Indonesia has also suffered a deterioraring CA balance, falling into deficit in 2012 and remaining in the red.

    So from a fundamental point of view Malaysia and Indonesia have both seen weakening external balances (i.e. falling CA balances), and this has hurt their currencies relative to other Asian peers. Now I won’t go into the economics, but sufficient to say that there is a direct link between the current account and the government budget balance.

    Malaysia has a rather large budget deficit by ASEAN standards (meaning the government spends more than it receives in revenues), larger even than Indonesia. This has to be tackled decisively to stop the ringgit’s weakening trend. Longer-term, the economy’s competitiveness needs to be enhanced so that there are more value-added exports.

  3. Let’s pray that our official statistics have not been “cooked”
    (like that of Greece before Syriza came to power, or like
    that of the Philippines under the Marcos regime)

  4. For once, someone writes a decent article on the Ringgit. I only spotted two mistakes:

    1. BNM does not operate a “managed float”, which implies regular intervention and a level target. BNM intervention has been very sporadic in the last ten years. The IMF de facto exchange rate regime classification for Malaysia is “Other”.

    2. Under a floating rate regime, FX reserves do not necessarily reflect inflows or outflows, as they automatically would under a fixed rate regime. Reserve positions will only move with inflows/outflows that exceed the banking system’s ability to absorb/supply FX. Otherwise, FX reserves won’t budge.

  5. “Its not the Ringgit that is falling in value, its that damn US Dollar that keeps rising in value that is causing Malaysia undue hardship”
    This would probably be the explanation by the Malaysian government.

  6. Well the phrase “the fundamentals are strong” becomes a mantra often quoted by geniuses who have the attention span of an ant.

    While we do have a high saving rate compared to many economies we are actually very soft in the head – seeing the exodus of foreign fund from the capital markets and fudged figures especially with respect to FDIs’. Our domestic debt ratio might be high, but that’s not the worrying part. It’s the unending slew of corruption and wastages coupled together with disregard for judicious fiscal-fiduciary responsibility and transparency that will do us in.

    Trust deficit ‘indicators’ have snowballed and Octo is back to demanding ‘Gold Standard’ – probably in gold Dinars, if he is to be believed. Even our homegrown auto manufacturer is tinkering with a new ‘global’ car model called “Unta TRX”. Dubious self-serving Politics day in day out, with a head honcho worrying about Nothing2Hide, instead of concentrating on the angry spirits of Kinabalu.., and worse still a cantankerous Nonagenarian. Class act.

    I wonder how much it takes to bribe those rating agencies? In USD. Meanwhile, you currency traders out there better peg your RM 3.80 to USD 1. But i doubt it’ll breach the 3.90 mark – because our “fundamentals are hormonally driven”.

  7. If the ringgit is down, it is down, regardless of whether it is driven by sentiment or otherwise. In simple term it means imports are more costly and more hardship for the poor, the wage earners. We don’t have inheritance like the Rqzak to cushion the fall. And after prices are driven up, businesses won’t let them down. Temporary or not, a weaker ringgit is a curse. I suspect Bank Negara is not as transparent as it should be. See when it answered questions on the movement of 1MDB’s funds, it resorted to the official secrets act to defend its action. Guess Zeti is paid in extra ‘units’.

  8. “The Malaysian Ringgit’s Slide”

    Also remember BNM is part of IMF & World Bank – the Global Banksters under Rothschild…

    Qoute: “A final Enron Lesson: When business and politics meet, it’s not a relationship, it’s a transaction.”

    Just to share this interesting article…

    “In this environment, how fast and how far will the dollar continue to rise in 2015?

    “Whenever a consensus is so unanimous, our gut tells us it is wrong,” BlackRock, the largest asset manager in the world, explained in its 2015 Investment Outlook. “Stretched positioning means even a mild disappointment to dollar bulls could prompt a sell-off in the currency.”

    That “consensus” that the dollar will strengthen is based on the end of the Fed’s QE, shrinking trade deficits due to rising oil production in the US and dropping oil imports. The consensus also relies on more demand for dollars as the Fed is threatening to raise interest rates in 2015, at a time when the Bank of Japan is madly printing money and pushing yields to new lows; and when the ECB is promising outright purchases of sovereign bonds on a massive scale.

    And true, BlackRock says, that increasing rate differential is going to create demand for dollar assets. But that “bullish dollar view is reflected in futures markets positioning. Trades against the euro look especially crowded, with short positioning almost three standard deviations from the mean.”

    Then there’s the “malign path” to a higher dollar: a global economic slowdown that would trigger “safe-haven buying.”

    Either way, the consequences of “a higher dollar can be brutal in the Emerging Markets, where the hot money gathers.”

    As dollar assets in the US become more attractive and as rates rise, that hot money simply evaporates from the Emerging Markets, and “funding sources dry up.”

    This triggers a chain reaction. To prevent its currency from going to heck, the central bank ends up selling its foreign exchange reserves and buying the local currency. This “tightens domestic financial conditions,” just when the ballooning issuance of US-dollar corporate debt in EM countries to lock in lower interest rates – see Russia – has created “pockets of vulnerability.” To attract liquidity, EM countries raise rates. But these rates trigger “slowdowns and currency gyrations.” Major crises have been the result.

    And speculators can muck up the scenario: short-term fluctuations in currencies are often the result of “flows and investor sentiment – which both can turn on a rupee.”

    But is the dollar rise a sure thing? BlackRock hedges its bets: “Forecasting currency movements has created many orphans.”

    The problem: these stubborn currencies don’t always play along. Turns out over periods of five years or more, currencies tend to behave in line with fundamentals, such as interest rate differentials and various central bank machinations. But not in the short or medium term.

    “Getting the direction right is one thing; getting the timing right is another,” BlackRock says. Appreciation cycles in the trade-weighted US dollar tend to last about six to seven years. But here is the problem: “Expect air pockets along the way.”

    http://wolfstreet.com/2014/12/28/whither-the-us-dollar-in-2015-blackrock-sees-air-pocket/

    Julian the Apostate
    December 28, 2014 at 10:08 pm

    China and Russia are both in trouble. What happen when one or the other (or both) start dumping Treasuries to buy gold?

    Buzz Hacksaw
    December 29, 2014 at 7:11 am

    “China and Russia are both in trouble.” ??
    Only because they hold US debt.

    VegasBob
    December 29, 2014 at 10:48 am

    Here’s what I see for 2015:

    TPTB will continue to do ‘whatever it takes’ to discredit gold as a measure of monetary reality.

    The world economy remains weak, weighed down by mountains of unpayable debt.

    Interest rates stay low, perhaps falling further, to avoid the need to restructure unpayable sovereign debt.

    JPY, EUR and CAD remain weak, giving USD the illusion of continued strength.

    Does a black swan take flight, finally bringing down the financial house of cards and plunging the world into the depression that has merely been postponed since 2009? I don’t know.

    Finally to share this…

    Dec 27, 2014 – Global Elite Look to Finish Off Russia in 2015 – https://www.youtube.com/watch?v=72WYE-aQ0e0

    “…the Bloomberg headline of half a dozen banks pleading guilty of conspiring to rig world currency markets raised alot of eyebrows…”

    2015 How the Banksters Fired Every Bullet they Had to take down the Russian currency – and FAILED – http://osnetdaily.com/2015/05/how-the-banksters-fired-every-bullet-they-had-to-take-down-the-russian-currency-and-failed-2/

    Quote : Either way, the consequences of “a higher dollar can be brutal in the Emerging Markets, where the hot money gathers.”

    “When the elephants (US vs China & Russia) fight, the ants get crushed.” – Bolehland being one of the the ants becomes “Collateral Damage” (plus its own self inflicted scandals, scams & debts ofcourse…?)

    You be the judge.

  9. @veritas

    I agree with most of what you wrote, but there is NO direct link between the government budget balance and the current account balance. This would only be true if you make the strong and very unrealistic assumption that aggregate household and corporate saving-investment gaps are constants.

    Otherwise you will have to explain why both the current account surplus and the budget deficit in Malaysia have been declining at the same time. If there is a direct link, the decline in the current account would have to be caused by an increasing budget deficit (note that the level of the deficit is irrelevant in this analysis, since we’re talking about a change in flows, not the flows themselves).

  10. /// fabulouscg June 11, 2015 at 3:21 pm
    I still remember 1 USD = 2.5 RM like it was yesterday. Good times… ///

    Go further back when the Ringgit was on parity with SingDollar.
    1USD should = 1.34MYR now. Better times…….

  11. Oh, I should add – the reason why the Ringgit and the Rupiah are performing worse than the rest of the ASEAN currencies is due to the drop in the global price of oil. As Malaysia and Indonesia are the only energy exporters in ASEAN with floating currencies, while the others are net importers of energy, the Ringgit and Rupiah should naturally fall as a result (Brunei is in a currency union with Singapore, and thus does not have an independent floating currency).

    As a benchmark for performance, it would be more appropriate to compare the Ringgit and Rupiah versus other energy exporters with floating currencies (the Middle East with its USD pegs therefore does not count), which would be Canada, Australia, Mexico, Russia and Brazil. YTD, the Ringgit is at virtual parity (plus minus 2%) against all of them, except Brazil (+10%) and Russia (-13%). The Rouble’s outperformance this year is largely due to the sharper drop it suffered last year (-50% against the USD), while Brazil is in worse economic shape than any of the others.

    Alternatively, we could look at countries within our rating band of A- e.g. Poland and Mexico. Again, Ringgit this year is at virtual parity.
    _____________
    Hishamh,

    We are talking about the ringgit’s decline against the US dollar. The rest are cross rates. Go to the nearby money changer and check. It is time you stop defending the government which has mismanaged our economy. Don’t compromise your reputation.–Din Merican

  12. Absolutely, Din.

    That guy doesn’t trade.. What is the use of ‘economics’ when real life issues that drive markets (trade in USD) are marginalized or glossed over as cross rates, instead of real hands-on business?

    Comparisons like these don’t make our life better and even the Saudis are suffering a budget deficit for the first time in eons.. Practical applied economics not feel good coma inducing platitudes.

    That’s why the Cambodians are smarter than us with their tourist market denominated in USD.

  13. hishamh,

    I find your claim that “there is NO direct link between the government budget balance and the current account balance” incredible. This link is one of the very first things you learn in an introductory macroeconomic course. Have you never heard of the “twin deficits” phenomenon? Do you not know the basic “national acccounting identity”?

    Let me remind you:
    National income (GDP) = Consumption + Investment + Government Spending + Net Exports

    Also:
    Savings = GDP – Consumption – Taxes

    Now replace “GDP” in the second equation with the first one and you get:

    Savings = Investment + Government Spending + Net Exports – Taxes
    Savings – Investment = Government Spending – Taxes + Net Exports
    Net Exports = (Savings – Investment) – (Government Spending – Taxes)

    (Government Spending – Taxes) means the government budget balance!

    Current account balance by definition is Net Exports + Net Income from Abroad. For most countries the Net Income from Abroad is trivial relative to Net Exports. So the Current account balance is largely determined by Net Exports.

    Hence, there is a direct link between the Budget Balance and the Current Account!

    Google “Twin deficits” to educate yourself please.

  14. hishamh,

    OK, to be fair I see that you are referring to changes rather than levels after reading your post more closely. You are basically saying that since the Malaysian budget balance though negative has been improving, it cannot be blamed for the widening CA deficit. That is a valid point, though only partly valid in my view.

    My view is that so long as the LEVEL of the budget deficit remains large, and it is not trivial to say the least, it is very difficult to turn around the current account deterioration. At the end of the day, a persistent budget deficit is contributing to weakness in the current account balance.

    The only short-term policy to turn around a CA deterioration in the face of a persistent large budget deficit is to devalue the currency. In which case, a weak currency is indeed a policy goal. But in this roundabout way, the currency is made weak because the budget deficit is too large or too difficult to tackle decisively.

    That is why the classic IMF “rescue” policy is to reduce the budget deficit and to devalue the currency.

  15. @veritas

    Actually, I took advanced macro classes, where they teach you that the simple stuff you learnt in introductory courses is not so simple after all.

    There are a couple of problems with your view:

    1. You’re making the mistake of taking an accounting identity and assuming a causal relationship. The national accounts identities will remain true, irrespective of the levels you slot in for the fiscal balance. That’s how we get fiscal deficits and CA deficits (Australia, USA), fiscal deficits and CA surpluses (China, Malaysia), fiscal surpluses and CA deficits (a few countries in the South Pacific and Caribbean), or fiscal surpluses and CA surpluses (Germany, Singapore, Denmark).

    Where’s the common denominator? There isn’t any, which would have to hold for changes in the fiscal balance to feed through directly into the CA term. Let’s break down the national accounts identity more fully into its institutional components:

    CA = S – I

    This can be decomposed into:

    CA = [S(c) – I(c)] + [S(h) – I(h)] + [S(g) – I(g)]

    where
    c=corporate sector
    h=households
    g=government

    An economy’s external balance can thus be described as the aggregated net savings of its institutional sectors (the economy’s internal balance).

    [Side note: You can use CA when you define income as GNI, which includes net income from abroad. If you use Y=GDP, then you should switch to net exports (NX).]

    For the fiscal balance to have a direct impact on the CA term, you must hold the terms for the corporate sector and the household sector constant i.e. changes in government spending and taxation have NO net impact on household or corporate sector income, expenditure and savings. Do you really believe that to be true?

    Note that during the only time Malaysia ran a consistent budget surplus (1993-1997), we also experienced a massive CA deficit. In other words, the shift from a budget deficit (which Malaysia consistently had from 1957 onwards) to a budget surplus, coincided with large and growing deficits in both the household and/or corporate sectors that more than offset the government surplus.

    How can that happen? Ever heard of the Lucas Critique? Or Goodhart’s Law? They’ve only been around for 40 years:

    https://en.wikipedia.org/wiki/Lucas_critique

    https://en.wikipedia.org/wiki/Goodhart%27s_law

    Standard macro models from the 1980s onwards included interactions and feedback loops between the different sectors of the economy. A change in the government balance does not happen in isolation.

    From a monetary perspective, a reduction in government spending/increase in taxation also causes a reduction in the flow of government debt accumulation (a surplus, of course, causes debt to decrease outright). That in turn causes long term interest rates to fall, which reduces borrowing costs for the other sectors, which makes investment cheaper. The result of reduced government borrowing is increased private borrowing.

    Alternatively, there are the interactions between the fiscal policy and monetary policy. A reduction in government spending/increase in taxation reduces real aggregate demand, which would technically reduce a CA deficit or increase a CA surplus (this is the mechanism which I think you have in mind). But an independent central bank with a full employment mandate would look at the fall in AD and respond with an easing of monetary policy (i.e. cutting short term interest rates). Thus we go back to the situation above, where private spending and borrowing replace public spending and borrowing.

    Whether a change in the budget balance would have an impact on the CA balance thus depends crucially on the linkages the government has with the other sectors in the economy. It is NOT automatic, and it is NOT direct. A reduction of the budget deficit could cause:

    a. The CA balance to increase
    b. The CA balance to decrease
    c. The CA balance to stay the same

    In the economics orthodoxy of today, the New Classical school rejects entirely the notion that changes in the government balance results in any real changes to the economy. The fiscal multiplier is zero, and increases in public spending crowd-out private spending, while decreases in public spending crowd-in private spending. The government’s budget balance thus transforms from an economic argument to a largely philosophical/political one on what is the appropriate size of government.

    In the New Keynesian school, changes in government spending does have an impact on aggregate demand, but the multiplier is generally small (i.e. less than one). The impact on the external balance is thus equally small.

    Monetarists (of the new or old variety), point to the important role of central banks with clearly defined mandates and independent of the government. A central bank can ALWAYS offset any changes in government fiscal policy, and in fact are compelled to do so in meeting their mandates of price stability and full employment.

    [cont…]

  16. [cont…]

    2. Second issue is you’re ignoring why the CA surplus is deteriorating in the first place. Going back to the break down of the national income identity by institutional sectors:

    CA = [S(c) – I(c)] + [S(h) – I(h)] + [S(g) – I(g)]

    Let’s simplify by denoting NS = S – I

    CA = NS(c) + NS(h) + NS(g)

    and taking the first derivative:

    dCA = dNS(c) + dNS(h) + dNS(g)

    Since dCA is negative (i.e. the current account surplus is declining), and dNS(g) is positive (the deficit is being reduced), then there has to be a decline in either dNS(c) or dNS(h) or both. As the aggregate flow of national savings (S) has not declined (dS = 0), we can thus infer that private investment has increased instead (dI(c) and/or dI(h) are positive).

    Which is also pretty much what the national income statements are showing. For that matter, that’s what the trade numbers are showing too – much of the increase in imports at the margin (i.e. growing above trend), is coming from imports of capital goods. The trend growth of consumption goods has not changed since about 2000. Growth of intermediate imports tends to vary with exports.

    Is this good or bad?

    Insofar as it reflects the higher cost of housing (the major component of household investment), it could be either. If it reflects increases in corporate investment in productive capacity, it’s fine. If it reflects increases in office buildings and commercial property, that might not be so good (depending on your view of how frothy the commercial property market actually is). If it reflects the public/private investment in public transport (MRT, LRT, aviation etc), then it depends on your view of the utility of these investments.

    What’s even less clear is how a more aggressive +dNS(g) would impact the direction of dCA or the level of CA.

    And I really don’t see the relevance of the “size” of NS(g) to the direction of dCA. That’s statistically impossible.

  17. An advocate compares with people who are worse off than us while a Journalist after comparing us with people who are worse off than us should compare us with those who a better off than us.

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