MIER Economist warns of credit rating downgrade due to dwindling forex reserves

August 4, 2015

Malaysia: MIER Economist warns of  credit rating downgrade due to dwindling forex reserves

by Ida Lim@www.themalayonline.com.


MIER Economist Dr.Zakariah A Rashild

Ratings agencies may revise downwards Malaysia’s ratings if Bank Negara Malaysia continues to dig into the country’s dwindling foreign reserves to prop up the falling ringgit value, economist Prof Zakariah Abdul Rashid cautioned today.

Zakariah noted that the country’s foreign reserves had fallen from US$ 140 billion (RM541.24 billion) in the first quarter of 2013 to US$100.5 billion by July 15 this year, while the ringgit’s external value had dropped from around 3.2 to the US dollar in 2013 to around 3.8.

He pointed out that Malaysia’s level of foreign reserves is one of the indicators of the country’s economic health, along with other indicators such as the government’s debt levels. “So reserves is like our deficit, if our reserves drop, ratings agencies will downgrade our ratings level. We are in a dilemma, what should we do?,” Zakariah,  who heads think-tank Malaysian Institute of Economic Research (MIER), told reporters here when outlining the possible negative effects of propping up the ringgit using Malaysia’s foreign reserves.

Zakariah said he had read an analyst’s comments that the dipping of Malaysia’s foreign reserves below the US$100 billion mark would trigger a ratings downgrade, but added that it remains to be seen what ratings agencies would do. He said ratings agencies do not merely evaluate a country’s ratings based on the levels of its foreign reserves.

Zakariah said Malaysia needs a high level of foreign reserves which would enable currency intervention as the country uses a “managed floating regime” for the ringgit, instead of letting it float fully.Malaysia should not be “complacent” even if its retained import figure is still good, Zakariah said, referring to the 7.9 months’ worth of imports that the country can make with its foreign reserves level of US$100 billion.

The country is also at a “critical” level and has to take care to ensure the ratio of its reserves to short-term external debt does not fall below the current 1.1 ratio. Today, Zakariah also highlighted that the ringit’s value remains unstable despite the huge sum of foreign reserves spent by Bank Negara Malaysia to intervene and defend the country’s currency.

“Should we do so (intervene) or if we should do so, how much are we prepared to spend?” he asked, reiterating his questions on the cost-benefit analysis of ringgit propping and whether or not it is a worthwhile measure.

Last Thursday, news agency Reuters reported that Malaysia’s reserves fell by US$5 billion in the two weeks to July 5 as the central bank moved to shore up the ringgit to keep it at levels around 3.8 to the US dollar, amid a financial scandal involving the  debt-ridden state-owned firm 1Malaysia Development Berhad (1MDB).

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Reuters said then that protecting the ringgit from political fallout may end up costing Malaysia more than any bailout for 1MDB, based on the rate that Bank Negara Malaysia was using its foreign reserves for the currency intervention.

Financial news wire Bloomberg reported the ringgit—which had seen its value fall to a 16-year low recently—depreciating for the fourth straight day today to 3.8650 per US dollar as crude oil prices fell below the US$50 per barrel mark for the first time this year.

The weakening ringgit value suggested that Bank Negara Malaysia was “stepping away from supporting” the currency, Bloomberg reported yesterday, citing Australia & New Zealand Banking Group Ltd strategist Khoon Goh.

13 thoughts on “MIER Economist warns of credit rating downgrade due to dwindling forex reserves

  1. The writer pointedly fails to mention the other factor… cost of borrowing and repayment of interest on existing debt. should interest rates go up as they are bound to.

    It is when this happens that we shall get a rude awakening on the stupidity of carrying long term debt… Each time someone questions debt we are told not to worry as our “economic factors are sound”… I have never understood the meaning of this phrase. But we may be about to learn…

    Deficit budgets over long periods invariably end in disaster. It is not complicated economics but simple common sense. And our real deficit is in common sense…
    Spot on, Isa. Budget deficits are not sustainable. They are intended for the short term (Keynesian solution). In the long term, Lord Keynes sadi, we are all dead.–Din Merican

  2. Another sign that the Malaysian economy is being run into the ground.

    Ironically, an ever weakening Ringgit actually enriches those residing here who have access to hard foreign currency.
    So, Malaysians who have family members working overseas and who send money home to the former, can actually snap up local property and other assets more easily!

  3. The Bugis prince cum Finance Minister is still in denial. He is so encumbered by the 1 MDB fallout that he could no longer think and walk straight. Every corner lurks a shadowy figure ready to pounce on him. Jibby, by all accounts, is afraid of his own shadow and is, therefore, ineffectual. Period.

  4. In addition to what Isa Manteqi mentioned, the other thing that irritates me is when folks say that Malaysia would be alright eventhough our debt levels are very high because most of our debts are denominated locally, and not in foreign currency.

    High debts, even if denominated in RM, crimps consumption. When consumption is crimped, that results in reduced savings and decreased investment. Reduced investments means less capital formation in productive sectors in the economy. This is basic economics.

    Now, consider the industrializing economy of Malaysia’s. Industrial production utilizes two main factors of production — labor and capital. More expansive and vertically deeper formation of capital (upstream/downstream activities creating strong linkages between sectors and industries in an economy) requires more increasingly skilled labor, makes (skilled) labor scarcer and more productive.
    A scarcer, more productive pool of labor attracts higher wage levels. Therefore, when high indebtedness and high levels of borrowing result in restrained investments and capital formation, the economy allocates less capital per unit of labor, causing labor to be less productive and correspondingly earn lower levels of wages.

    It is evident that Malaysia is stuck in a low wage – low productivity – high dependence on unskilled labor cycle. High indebtedness can cause permanence to this low wage – low productivity – unskilled labor situation, what has come to be known as the low income trap. In many ways the effects are more debilitating than those of a recession, which are usually caused by temporary shocks in demand.
    There is a reason for the wide difference in wages between an engineering graduate in Singapore and in Malaysia (even if measured in their respective currencies!!), and more importantly why real (even nominal) wages for a graduate have hardly moved in Malaysia in the past 20 years while those in Singapore has gone up meaningfully, and have even doubled for some disciplines.

    One can argue having foreign debts are worse but even high levels of household and government debts in local currency can be just as destructive. While the effects of foreign debts are more easily quantifiable, the opportunity costs incurred by high levels of indebtedness are possibly far greater.

    In any case, 1MBD and Petronas, the main contributor of corporate taxes and dividends to the Malaysian treasury, have issued significant amount of dollar-denominated bonds. Of course, in Petronas’ case it made a lot of sense to hitch their debts to the currency of their revenue when oil prices and margins were strong.
    The coming weeks and months will see them sailing through rough seas in inclement weather.

  5. We must be living in another world. Even to buy the cheapest property, say, RM500,000 on 25- year loan means that you will end up paying about RM1,000,000. Your payment to the bank per month is RM3,333,33. Give and take 6% for GST. So if you have a members of your family working overseas and he or she gives you US 500.00 a month life will still be hard said the monkey sitting on the railway track. You can only profit from the exchange rate when there is initial overshooting. For that you must have the ready foreign cash. And how many of us outside the 2% of the population have that luxury. So let us all get real and try to Make Malaysia Better and lift the bottom half out of their present position. Just making macro pronouncements without changes at the micro level will get us no where.

  6. “In the long-run, Lord Keynes said we are all dead” – Din Merican

    Correction: “In the long-run, Lord John Maynard Keynes said we are all ALREADY dead”

    Chettiar money-changer wants MYR4.03 for USD1.00 and I told “purdah-lah Anay…” and he told me “purdah you back…” and guess what, he was right… not a single Chettiar in Chulia Street or Beach Street wants to trade at below MYR4.03 and even then, limited to USD500 per person and USD3,000 for regulars like me…

    Now we are all all DEAD!

  7. Din,
    As for Isa’s commentary, we got to wait for Hisham the economist to comment on this state of Malaysia economy helmed by Najib. Ktemoc, RPK’s sidekick would further commentary on how bad everybody is except Najib and Rosmah…….Hahahaha
    Meanwhile arrest warrant for Clare Rewcastle Brown

    Time to ask ktemoc or better still RPK, what happened to RPK’s extradition hah?


    Oooi……How many years oredi?

  8. I did say some while back that we better start on a voluntary austerity programme nationwide… because if it is imposed on us by creditors it will be that much more painful…

    And no, I am not thinking of Greece… they had worthless “money” thrown at them which then turned into real debt.

    Ours is already real debt of our own making…

  9. Isa,
    Why not start by revoking malay special position in the constitution? Come to think of it originally, it only meant for 10 years after independence. Why should rich melayu pay 7% discount for multi million houses in Malaysia? Dare?

  10. For decades, the Malay/Muslims’ self proclaimed ‘ entitlements ‘ and ‘ victims ‘ industries are doing very well…….these people are ready to only fight for their ‘ entitlements ‘ for being ‘ victims ‘ of ???.

    It is not the lack of opportunity. They are not prepared to work hard from ground level to participate and contribute meaningfully to the economy and save for a long period of time to slowly build their wealth. They want the reward and position now.

    If they have personal issues, their solution is to use politics to fight for their ‘ entitlements ‘. This is most damaging to the economy to create real jobs and income.

  11. As in the State run economies of Eastern Europe the NEP may not be able to build a fundamentally strong, viable and sustainably economy. But a fundamentally strong, viable and sustainable economy will be more that able to sustain the NEP.

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