In November 2006, I mentioned how the Mundell-Fleming model works by applying it to the then-current economic situation in Malaysia. Among many points that were mentioned in that post is the connection between government spending and net export. The rationale is, greater government spending drives up the interest rate and encourage capital inflow, which later, appreciates the Malaysia ringgit. The appreciation hurts export as local good become relatively more expensive compared to foreign goods.
For the past two or so weeks, the issues of too much net capital inflow to Malaysia as well as increasingly large foreign reserve are popping up and has fueled rumor on further liberalization of the Malaysian ringgit. Though the current appreciation is definitely not exclusively caused by government spending, I have no doubt that the thumb prints of government spending through the Ninth Malaysia Plan is somewhere the Malaysia economy.
Further, about a month ago, the executive director of Malaysian Institute of Economic Research (MIER), Mohamed Ariff criticized the idea of having too big foreign exchange reserve:
THE size of foreign exchange reserves held by central banks the world over is often viewed by analysts, investors and policy-makers as a key indicator of macroeconomic strength. This notion is pitifully assailable, not only because inter-country comparisons are fraught with pitfalls, but also because the bigger-the-better argument does not hold water.
[…]
A robust domestic economy would also shift the focus from preoccupation with exports, current account surpluses and large reserves to internal dynamics that would drive imports closer to exports and the balance of payments closer to equilibrium with current account balance and stable external reserves. [When larger reserves may not really be good. NST. February 9 2007]
It would be interesting to observe the Malaysian export trend in the next few months if the ringgit appreciates further. I however am convinced that export will slow down, induced, in part, by both stronger currency and weaker demand in the US.
Another thing is, at the Wall Street Journal Asia:
A mild slowdown in the U.S. could actually further the government’s efforts to rein in growth. It might also encourage Chinese companies to focus more on serving domestic consumers than overseas ones—another shift China’s leaders are trying to promote. [China’s export engine survive a U.S. slump. WSJ Asia. April 10 2007]
In other words, China might actually look forward for a slowdown in the United States to cool down its economy. But admittedly, the article suggests that a minor slowdown in the US would not hurt China too much. That however does not change my mind that China could not be Malaysia’s savior if an US slowdown occurs, for reasons stated here.
p/s — on Saturday morning, I came across this:
PETALING JAYA: The year-on-year slide in Malaysian exports for the month of February cannot be attributed to the strengthening trend of the ringgit, said Second Finance Minister Tan Sri Nor Mohamed Yakcop.
Nor Mohamed was reiterating economists’ view at the beginning of the month that the weakening in exports was due partly to shorter working days and a decrease in overseas purchase of items such as electrical and electronic products, transport equipment as well as petroleum products. [Minister: Drop in February exports not due to strengthening ringgit. The Star. April 13 2007]
Fair enough.