October 5, 2015
MY COMMENT: What we hear our politicians, public officials and some of my mainstream economist friends say repeatedly is that Malaysia’s economic fundamentals are sound. By implication, that means the ringgit which is a barometer of our national economic health, is grossly undervalued.
Is our economy fundamentally okay? They are not prepared answer that. In stead, they blame speculators and foreign exchange traders for “shorting” the ringgit by switching to a safe haven currency like the US dollar and, to some extent, the Singapore dollar. This flight to safety is a normal and rational thing to do. Savers and investors do not want to hang on to a currency that slides every moment of the day.
Uncertainty is a killer and the prudent will play safe. I am yet to be convinced that our economic fundamentals are what our politicians and their officials say they are. We face serious political uncertainties, resulting in a loss of public confidence and trust in Prime Minister’s leadership and management of our national finances. The repercussions of the ringgit’s slide are being felt in the cost of living due to inflation, which has always been understated due to occasional manipulation of the CPI by the Statistics Department.
The ordinary man in the street does not need to rely on official statistics. He knows how much he can buy with his RM50 in the supermarket and how much he has to pay for his roti chanai and tea tarik today compared to, say, 6 months ago. He does not need some hot-shot mathematical economists to tell him on behalf of the Najib administration that our economy is doing fine. These experts themselves will soon know when they are not paid their salaries on time.
I have been taught in my business education to focus on systematic identification of problems. Once you know what the problem (s) is, the solution is in sight and you can begin to fix. Our politicians and their officials are obviously in a state of denial. They know what is happening and they may even have solutions. But they lack the courage to deal with our national malaise.
Our Government under Finance Minister Najib Razak has been fiscally irresponsible and corrupt, spending money recklessly. The time to own up to this is long overdue. We can no longer ignore what financial and capital markets are telling us. We are in a financial crisis. Our bonds are now junk bonds and our ringgit is sliding rapidly. It is the economy, stupid.
We may not need capital controls, and do not have to waste our foreign exchange reserves to defend the ringgit. Deal with the confidence factor and ask Najib to step down and face the consequences of his failed policies. –Din Merican
The Ringgit: To Peg or Not to Peg, that is the Issue, or it?
by T.K. Chua*
I have read a few times now statements made by Bank Negara Malaysia Governor Tan Sri Zeti Aziz, Minister Datuk Seri Abdul Wahid Omar, as well as Finance Minister and Prime Minister Datuk Seri Najib Razak, that the ringgit will not be pegged to another currency for now. Neither is there a plan to impose capital control.
For many Malaysians, seeing the value of ringgit evaporating, the statements by our “custodians” of ringgit are not really a welcome relief. I think many Malaysians have long yearned for ringgit to recover and stabilise at a more “decent” level. In their minds, if we ever peg our ringgit, the rate should be higher than the present level.
Unfortunately, the ringgit exchange rate is not something that can be decided by a “decree”, i.e., that can be unilaterally decided by the government. If it is so simple, I think the government would not have allowed the ringgit to depreciate to this pathetic level as seen today.As far as I know, pegging the ringgit requires strong fundamentals. In other words, the economic strength must be present to support the pegged exchanged rate, failing which the peg will give way in no time. Hence, many of us could be mistaken if we think a quick peg by the Malaysian authorities would return the “value” and “stability” of our ringgit.
More crucially, I think the Malaysian authorities are in no position to peg the ringgit right now, not that they are exercising their option not to peg it. As I see it, pegging the ringgit at a lower rate (say RM5 to US$1) is meaningless, at least in our present circumstances.
But if we wish to peg it at a higher rate (say RM3.50 to US$1), the fundamentals must be present to support it. Do we have the strong fundamentals right now to support a higher pegged exchange rate?
Exchange rates are determined by numerous complex factors that have often left the most experienced economists baffled. So I will just list a few factors which may be relevant for all of us to look at. It is really up to you. First, our inflation is relatively high, more so with GST and subsidy rationalisation. High inflation is not good for exchange rate. Typically countries with higher inflation will suffer depreciation in their currency in relation to the currencies of their trading partners.
Second, our interest rates are low because we value borrowers more than savers. Low interest rates tend to decrease exchange rates, ceteris paribus. Third, we still enjoy current account surplus in the BOP, but the surplus is narrowing, due in part to poor commodity prices and weaker economies of our trading partners.
Balance in the current account reflects demand and supply of foreign currencies and ringgit, and hence the exchange rates of ringgit. Fourth, high public debt is a concern. It causes default risks and heightens potential inflation. It discourages capital inflows and encourages capital flight. All this is not good for exchange rate.
Fifth, the terms of trade are against Malaysia’s favour due to continued weakness in commodity prices. Sixth, political and economic stability is most important. A country with positive attributes will attract investment and capital inflow while those perceived to be risky will suffer reverse flow.
In extreme cases, political turmoil could cause a loss of confidence in a currency, rendering the value to much lower than the equilibrium rate. We are Malaysians. We read news and events unfolding each day in our country. It is for you to assess the factors and make a judgement call. –
* T. K. Chua reads The Malaysian Insider.
Din Merican: the Malaysian DJ Blogger 
If it is possible to peg it at RM 3.5 to $1 US, why are they afraid to do it? Some assholes cannot stop looting the treasury.
All those factors that currently adversely affect our economy & RM currency will NOT change even if Najib resigns tomorrow. It’s just our Malaysian society which is never satisfied, always critical of anything & everything worsened by our untrustworthy leaders interested only in their self-interest that are the problems made virul instantly by the Internet.
They should peg it alright. Peg it to the Rupiah!
> high public debt is a concern.
I think our public debt is the nation’s last concern, since the nation got to swindle the world into our Ringgit denominated sukuk bond. It is only a mere concern as the nation needs to roll over debt to service 1MDB debt, and to weather the incoming doom of ending of credit limit.
On the contrary, private household debt is a more immediate concern. Getting the 1% of the political and financial elite to share with all of the rest is a grave concern. A lot of money printing is needed to allow all to continue to stay afloat. But, that will only drive the ringgit down even more. We saw how hurtful it is, as the rakyat got to see everything becomes more expensive, feeling the brunt of inflation. Uneasy rakyat would only caused more to do silly things.
Without some credible leadership, our economy could hardly be efficient enough to translate the cheaper ringgit into more export in a shrinking world.
End corruption, end cronism, and end racism is the only immediate cure-all for the nation. We should be really worried as the ‘experts’ finally have been forced to spin some stories. Their political masters are making them work harder.
On the question to peg or not to peg, I believe it is best that our Bank Negara put in a credible floor which the nation could support as soon as possible. The rakyat has no buffer to face a hyperinflationary Malaysia.
Where is Hishamh? –Din Merican
DM-I read somewhere that recently he has been laid low by the haze. Not sure if that’s true.
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He does not give a damn about the economy and Malaysians. So, I am not surprised if he and Rosmah remain abroad. He has a budget to present to Parliament and should be working hard on it.–Din Merican
Yes, it is like the status of a pensioner. He lives in a house valued at RM1.5 Million he receives a Pension of RM2,000.00 but has a cash flow problem because of his unexpected to pay repair for car, house and help his son to buy a house. His fundamentals are very good but he has a cash flow problem. This a typical Third World Syndrome.
Peg again and become the pariah economy of the world? How about starting a monetary union for a regional Asean currency that could be stronger and stable than its sum, with the support of China?
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Fine, but first let us get our house in order. Otherwise, we have no credibility to be listened to. Can’t bull the rest of the world like these politicians do to us the gullible Malaysians.–Din Merican.
Currency controls and the option to revalue currency are crucial elements if any country is to retain its true monetary sovereignty.
Economists will tell you otherwise… even throw up their hands in horror… when they do they are only dancing to the tunes of their puppet masters… the speculators… who in this day and age can practically wipe out a small country.
Our reserves will not be sufficient in the event of a massive downturn… so currency controls must remain a clear and quick option.
”In 1967, when sterling was devalued, the dollar’s peg to the pound was increased from 1 shilling 3 pence to 1 shilling 4½ pence (14.5455 dollars = 1 pound) although this did not entirely offset the devaluation. In 1972, the Hong Kong dollar was pegged to the U.S. dollar at a rate of 5.65 H.K. dollar = 1 U.S. dollar. This was revised to 5.085 H.K. dollar = 1 U.S. dollar in 1973. Between 1974 and 1983, the Hong Kong dollar was floated. On 17 October 1983, the currency was pegged at a rate of 7.8 H.K. dollar = 1 U.S. dollar, through the currency board system.
As of 18 May 2005, in addition to the lower guaranteed limit, a new upper guaranteed limit was set for the Hong Kong dollar at 7.75 to the American dollar. ….”
Sources :
https://en.wikipedia.org/wiki/Hong_Kong_dollar
It is not a bad thing, neither a taboo .
Currency peg had worked well for Hong Kong in good or bad time, even when corruptions were quite rampant in 1960s and 1970s. So it can work well for Malaysia. In fact, it did worked perfectly following the Asian Currency Crisis for the ringgit.
I strongly support the peg, if found the ringgit is manipulated, sabotaged largely by speculators and manipulators with intentions to destabilize the country’s currency and economy for political and personal gains at the people’s expense.
Any PM of the day would seriously consider and understand the mechanism its meritorious implementations, decisively ,sooner the better, before the situations and circumstances of the dire state of affairs may subjected to further undesired ill-conceived attacks.
If it needs to be done (the peg),rulings and regulations should formulated to target the saboteurs and manipulators, rather than restrict its productive transactions in free trades in open economy, and at a right value that is feasible with the country’s intrinsic backings and reserves.
Though pegged, the HK$ is the one of top ten most traded currencies in the world.
Why, not the ringgit, unless leadership is the problem ?
Good point about pegging…provided we avoid the mistakes of the sad example where it failed… Argentina.
Kllau,
Jibby can’t use the same trick because this time Jibby is owing international ah long money. For this, watch How to become Chancellor of Exchequerin Denis healey’s column in this blog
@ loose 74,
Not condoning or supportive of most things what Jibby had done or are doing, so far, I think it is a bit premature to make a final judgment. It is less than 100 days since the severing of the umbilical cord attached to TDM on sacking his deputy.
He is independent now but not quite of his puppet master’s entrenched negative influence and legacy (culture of MACCP) which was left behind in the party and the country’s weak delivery systems, though he (Najib) has inherited both the power(+) and culture(-) from his master.
Najib is part of and solution to the problems of the country’s present dire affairs. He needs to realign himself and show quality leadership, meaning, making full use of the power and getting rid of rogue culture swiftly to act competently and productively, decisively and rationally for the benefits of the people.
Given a couple of months from now to show results or he will be written off with the empowerment of the people. Malaysia had waited 40 years for this threshold moment, what is a few more months to bear, bearing in mind time and events happening in this fast changing information technology age waits for no one.
Time is not on our side for people neither is for Najib as PM. Each day is getting nearer to GE14. It is the last and only chance left for him to show leadership of ACGT. There shall no further blaming excuse.
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If since 2009 he has been giving us crap, how long more do you want him to stay. He is the problem, not the solution. He is not running the country. Rosmah is the boss. I disagree with your take, or could you like Wayne be joking? –Din Merican
……….cont. from previous…….
Beside,
Unlike HK, Malaysia are blessed with everything, except one thing, the practice of leadership based on Accountability , Competency, Governance and Transparency , the ACGT or its equivalence.
…and if Najib was incapable of just doing the one thing that the people basically need, he ought to resign or be booted out from Putrajaya , the sooner the better.
We cannot simply peg the Ringgit whenever the exchange rate is not in our favor and unpeg it when it is in our favor. We just cannot do that.
Pegging the Ringgit is very easy. We can peg it to 3.80 or 3.50 or even 1 to 1 to the US dollar just like what Argentina did. That’s the easy part. The difficult part is affordability. Can we afford it? If not, then we have to impose currency control like what we did back in 97. Do we have to do that?…… again?
The value of a currency is not the value, its the trust. Just ask Din what it feels like when he flipped out RM50 in a foreign country and it was rejected.
If we still want peg the Ringgit, fine, do it without imposing currency control and this time make it permanent. The more we shift goalposts the less value our Ringgit will be.
Look no further. The Brunei Dollar has been pegged to the Sing Dollar for the longest time. It is interchangeable. In fact, the Sing Dollar and Ringgit used to be interchangeable until Malaysia decided to uncouple, as it did with the airlines.
Regrets?
I feel pegging is being confused with currency controls here. The two are not necessarily connected.
Pegging works best if the country is on a good productive footing… meaning making goods that can be sold.
Currency controls are held as a reserve option in a world where currency is bought and sold like a commodity… A single speculator or rogue trader can create havoc in a smallish country like ours… hence controls.
Why controls are disliked is because some say it puts foreign investors off… this need not be the case if controls are run on a double track system. This, however, needs shrewd and quick response financial expertise… and we are lacking these…
Our earlier controls worked quite well … so well that one respected foreign publication was able to admit that the IMF had been made fools of…. Not bad at all…
You don’t have to impose currency control if you have “adequate” reserves in Bank Negara to support and defend the peg.
Back in 97, HK was about to go down as well until China “voiced out” to HK, “Need my help?”.
Sorry, do not agree that the purpose of adequate reserves is to prop up a peg.
The best defence of a peg is to have a productive economy and (this is crucial) a no-nonsense team to monitor exports.
Argentina had huge resources but allowed itself to implode precisely because the system was corrupt to the core.
Reserves are best seen in the old fashioned way… hard earned lolly put away in a national tabung to be used, when necessary, to prop up citizens’ lives, not a peg.
“Reserves are best seen in the old fashioned way… hard earned lolly put away in a national tabung to be used, when necessary, to prop up citizens’ lives, not a peg.”
Please explain to me why Bank Negara did not convert all the foreign currency reserves into Ringgit and dump them into KWSP for investment? It’s a waste to have so much money sitting there doing nothing, right?
“Sorry, do not agree that the purpose of adequate reserves is to prop up a peg.”
If not for Bank Negara using their reserves to intervene, our Ringgit would be above 5 by now. Every country in the world need to have a Central Bank to monitor their currency to stabilize the currency as and when necessary. Not only intervene when it is going down but sometimes the reverse. If a currency is getting to high, our exports will be expensive. They have to bring it down. Without pegging our Ringgit, Bank Negara is not pressured to intervene if it does not want to. If Pegged, they have to defend the peg profusely. If Pegged with currency control, relax, nothing much to worry.
“The best defence of a peg is to have a productive economy and (this is crucial) a no-nonsense team to monitor exports.”
You are right about this one though.
“I feel pegging is being confused with currency controls here. The two are not necessarily connected.”
I do not understand what you meant here. You mean only imposing currency control without pegging? If so, may I ask what is the objective? If to make the currency stable, ie. no going up or down. Then it sounds to me like pegging.
If the objective is to make sure it only goes up and not down, then it’s “cheating”. Who wants to trade with you? Perhaps you have other objectives to share.
Our currency did NOT fall on its own… there was clearly massive manipulation (arm twisting in the run up to TPP?).
Today, I hear RM has had massive gains… all in one day…and curiously AFTER the TPP was signed…
Clever speculators can make money when markets are going up… and even more money when they are going down.
Time will tell the real story…
The USD weakens against all major currencies. Not RM up. Don’t be so happy. Our troubles are not yet over.