Tag: Malaysian ringgit

Categories
Economics

[1765] Of why would the Bank Negara defend the ringgit?

There is a suspicion that the Bank Negara bought a lot of ringgit today by selling the US dollar in order to defend the ringgit from further depreciation vis-a-vis the dollar.

KUALA LUMPUR, Sept 5 (Reuters) – The Malaysian central bank was suspected of selling dollars on Friday, joining counterparts in South Korea, Indonesia and the Philippines in defending their weakening currencies. [Malaysia c.bank sells dlrs to defend ringgit-traders. Reuters via Forbes. September 5 2008]

Why would the Bank Negara want to defend the ringgit?

Is it due to nationalism?  Is it an order from Putrajaya? Is it to mitigate the more expensive import priced in dollar? Is it to fight more expensive crude oil due to strengthening dollar vis-a-vis the ringgit? Is it due to too much foreign-denominated debt, just like in what happened in 1997 in Thailand?

The simultaneous sales by four different central banks also raise question.

Is there a collusion by the four banks to stop the US dollar march upward? If the motive is so, would such collusion garner enough influence to affect the US dollar?

Categories
Economics

[1679] Of Dr. Mahathir’s got his economics wrong

Spot the error:

In the first place the Government should not have floated the Ringgit. A floating rate creates uncertainties and we cannot gain anything from the strengthened Ringgit. Certainly the people have not experienced any increase in their purchasing power because of the appreciation in the exchange rate between the US Dollar and the Ringgit.

Actually the Ringgit has increased by about 80 sen (from RM3.80 to RM3.08 to 1 US Dollar) per US Dollar, i.e. by more than 20 per cent. Had the Government retained the fixed rate system and increased the value of the Ringgit, say 10 per cent at a time, the cost of imports, in Ringgit terms can be monitored and reduced by 10 per cent. At 20 per cent appreciation the cost of imports should decrease by 20 per cent. But we know the prices of imported goods or services have not decreased at all. This means we are paying 20 per cent higher for our imports including the raw material and components for our industries.

Since oil prices are fixed in US Dollar, the increase in US Dollar prices of oil should also be mitigated by 20 per cent in Malaysian Ringgit.

But the Government wants to please the International Monetary Fund and the World Bank and decided to float the Ringgit. As a result the strengthening of the Ringgit merely increased our cost of exports without giving our people the benefit of lower cost of imports. [Oil Price. Dr. Mahathir Mohamed. June 5 2008]

If you cannot find the mistake, I would like to point out that the former Prime Minister does not appreciate the concept of ceteris paribus.

Categories
Economics

[1517] Of a basket of currencies please

When opining on the strength of the Malaysian ringgit, many implicitly use the US dollar as a benchmark. That has caused some people to overstate the relevance of trends generated by the two currencies to the Malaysian economy while missing out the bigger picture altogether.

The United States is an important export destination for Malaysian goods and this is why the MYR-USD exchange rate receives the special attention in the public sphere. However important it might be, trend associated with movement of the rate blurs out the actual meaning of changes of the rate.

There are a number of factors that affect a currency’s strength but essentially, it comes down to capital flow. An inflow strengthens the currency and an outflow does otherwise. The MYR has been strengthening against the USD ever since the pegging of the former currency to the latter was removed back in July 2005. Meanwhile, the USD has been slacking against various currencies, including against the MYR. If the MYR and the USD were the only currencies in the world, one would assume that capital is flowing from the US to Malaysia. The issue is that there are more than two countries in this world.

One will reach the same assumption, albeit wrongfully, if one concentrates on the MYR-USD exchange rate alone. Through that, it is easy to get a feeling that the MYR is appreciating in general. Coupled with the perception that a strong currency is a good currency — a strong currency is not necessarily a good thing; it depends on the composition of the economy; an export-oriented country would hate a strong currency — among lay observers of local economy and politics, it contributes to a kind of unfounded optimism.

It is unfounded because not all of the strengthening of the MYR against the USD is caused by attraction that the Malaysian economy creates. Part of it is contributed by uncertainties in the US economy which has nothing to do with the Malaysian economy. On top of that, not all of the capital that flows out of the US economy is flowing into Malaysia. There are other countries out there but yet, a lot of laypersons seem to overlook that fact.

The truth is that while the MYR has been strengthening against the USD, it has not really shown the same trend against our other major trading partners like Singapore and Japan. The USD on the other hand has been growing weaker against a majority of other currencies.

The USD can become weaker against the MYR if capital flows out of the US to a third country. In other words, the MYR can appreciate against the USD without the Malaysian economy doing anything positive. Indeed, with enough outflow from the US economy to a third country, the MYR could appreciate against the USD even when the Malaysian economy is bleeding to death!

So, I guess what I am trying to say is that please do not measure the strength of the MYR solely against just the USD and then make a conclusion about the Malaysian economy. Instead, take a basket of currencies or more precisely, currency of Malaysia’s main trading partners. The latter method will help anybody to arrive at a more accurate conclusion than the former method will ever allow.

Categories
Economics

[1380] Of targeting for an unchanged Malaysian rate

Do we need a rate cut following the September 18 footstep of the Federal Reserve to properly manage the Malaysian economy from the monetary side of the equation?

The answer is possibly no. While the US is the largest trading partner for Malaysia, the state of the US economy is not the only factors that need to be considered in managing the local economy.

The slowdown of the US economy, partly signaled by the slowdown in demand for electronics as well as the subprime mortgage crisis affect trade between Malaysia and the US adversely. The effect however is being mitigated by large government spending and as mentioned earlier by Bank Negara, robust domestic consumption and investment. While I personally expect a slowdown in the Malaysian economy, I have a feeling that the state of our economy is healthier than the one suggested by those in the broking business. For those following the security industry, suddenly, they have become more pessimistic than me!

Anyway, with a respectable performance so far, there is limited need to cut rate in order to boost the economy. We need not appeal to the short time horizon that any financial indicator proffers.

At the same time, with the rate cut by the Federal Reserve, it might actually spur growth for the Malaysian economy. First of all, it might improve the US economy which in turn encourages trade between the two countries though Malaysian export will be more expensive compared to US goods; US export will be cheaper compared to Malaysian goods. Secondly, with the reduced interest rate differential between that in the US and Malaysia, more funds could actually flow into Malaysia. Both, sooner or later would strengthen the Malaysian ringgit against the US dollar as capital flows into Malaysia from the US.

So, against, less reason to cut the Malaysian rate the next time the Bank Negara Monetary Policy Committee sits in October next month.

On the other side, inflation seems to be well contained. Hovering around 2%, it might give a rate cut a chance but with the upcoming festive season as well as increasing crude oil price, it is not wise to bet for a rate cut.

If I were a voting member within the MPC and the environment stays practically the same, I would vote like how the MPC had voted earlier; do nothing to let the rate stays at 3.50%.

Categories
Economics Society

[1335] Of now, moving on to something more important than Negarakuku…

I find it amazing how too many people are preoccupied with Namewee’s Negarakuku, especially but those that want punishment to be brought upon him for whatever he did. The thing is, he did nothing but criticized the state of our society. His action affects nothing but a lot of people’s ego, being too sensitive to criticism. It’s okay to disagree with any criticism but demanding a person to be silence by force because we disagree with him?

So much for a matured society.

Islamists and nationalists, the Cabinet even, are harping on the issue so hard as if there is nothing else that is important, more deserving of their attention. To me, the issue surrounding fiasco surrounding the Port Klang Free Zone, is much more crucial to our society.

And here is something that affects a lot of people but receives too little attention as well. According to last week edition of HSBC Research, quoted by The Edge, total trade for June 2007 is 0.9% lower than a year ago. It is pretty much attributed to a 22% drop in export to the US.

From the Malaysian Department of Statistics:

In June 2007, external trade data posted a surplus of RM8.7 billion as compared with RM8.2 billion in the same month of 2006. A growth of 5.6% or RM458.1 million in the trade surplus was due to a lower decline in exports of 0.4% or RM186.8 million vis-a-vis a higher decline in imports of 1.6% or RM645.0 million. Total imports and exports for the month were valued at RM40.3 billion and RM49.0 billion respectively as against RM41.0 billion (imports) and RM49.2 billion (exports) a year ago. [Malaysian external trade statistics, June 2007. Malaysian Department of Statistics. August 9 2007]

On the surface, several factors could be attributed to the fall in export. One is the fall in demand for electronics in the US, which itself could be attributed to the current slowdown in the US economy. Second is the appreciating MYR against the USD.

I however unable to find a reason for a fall in import. It might be due to slowdown in consumption component of the GDP which could signal an economic slowdown. I have yet to see a data on consumption to strengthen the base of my suspicion.

Regardless, issue of subprime mortgage in the US brought the Fed to do a helicopter drop. Several others central banks went to do the same thing in hope to increase market liquidity. In fact, increasing number of people now believe a rate cut is coming.

A rate cut would signal this: a transfer of focus from inflation to economic slowdown; there are few that prefer to use the word recession instead. The FOMC convened earlier this month and decided to keep the federal fund rate untouched, apparently confused whether the economy was growing or shrinking.

Given how important the US economy is to the Malaysian economy, I expect a dent though government spending via the Ninth Malaysia Plan might take up the slack. Keynesians would love that possibility.

As for the election, well, suffice to say, I think the government of the day has missed the chance to dissolve the Parliament during a time of exuberance. From now onwards, only uncertainty remains.