Tag: Malaysian ringgit

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[2954] The frustrating read that is Notes to the Prime Minister

The ringgit has been on a depreciating trend versus the US dollar since early April 2022. While it is natural for Malaysians to focus on the ringgit, the depreciation is best explained by the strengthening of the US dollar against a slew of other currencies. Global events are triggering capital to head to the US, leaving other economies having to deal with the repercussions of such capital flight. But this fact does not stop Malaysians from calling domestic authorities to do something about the depreciation. Former Prime Minister Mahathir Mohamed recommends Malaysia pegs the ringgit as the country once did.

This is where Wong Sulong’s Notes to the Prime Minister: The Untold Story of How Malaysia Beat the Currency Speculators might be useful in providing greater details how pegging and capital control of the 1990s came about.

Unfortunately, the book does not do the job very well by digressing too much.

The book is firstly a reproduction of notes Nor Mohamed Yakcop wrote for the Mahathir at the heights of the crisis. Nor Mohamed is the architect behind the pegging and possibly the brain behind the rebuilding of Malaysia post-Asia Financial Crisis.

Secondly, it is an unexpected festschrift-like tangent in honor of the man, written by men and women (themselves had, and have, big roles in corporate Malaysia post-1998) Nor Mohamed recruited to head various government bodies and companies.

While the notes are useful and enlightening, the book is deficient in a way the notes are ill-supported by context-making commentaries. Because of the structure, the book makes a disorienting read, which leaves me dissatisfied.

When I bought the book some time back, I had expected it would discuss how Malaysia came to the decisions it made, and how the debates among those in power went. Furthermore, given the book was published more than 10 years after the crisis, possibly a critical review of the pegging and capital control.

There is no critical review. When I write critical, I do not mean criticizing the actions. Rather, I expect an examination why the policy worked for Malaysia. What we have instead is assertion that it worked and everybody else in the world was wrong.

Debates had around the various policies advocated by Nor Mohamed through notes are totally absent. A reader would need prior and outside knowledge of the economic and political environment of the 1990s to truly comprehend the reasons and tensions behind the notes. For instance, Nor Mohamed in his letters to Mahathir here and there criticized decisions taken by the Finance Ministry and the central bank, both of which were responsible to the then Finance Minister, Anwar Ibrahim. But Wong Sulong left the tensions largely out. I did not expect a full political analysis of tensions between Mahathir and Anwar, but I think it would be reasonable to expect an exploration of policy difference between the two men in response to the Asian Financial Crisis.

This makes me feel reading the book a little like reading Malaysian newspapers in the 1990s and the 2000s. Journalists during those decades (sometimes, even now) liked to write about the government’s reply to an issue, but not the issue itself. Imagine the government saying “everybody is alright” in response to a major vehicular accident, but that accident is not mentioned at all. The public of that era would have to guess what the government was referring to. Reading Notes to the Prime Minister is a little bit like that: frustrating. Annoying even.

Nor Mohamed proposed multiple policies in his notes, but readers are left to guess whether the policies were adopted. This is yet another example how the Wong leaves the notes uncontextualized.

My frustration grows further when in the chapters following the ‘notes,’ the book goes off tangent to celebrate Nor Mohamad. The man deserves to be celebrated, but the book overly does it by having various then-contemporary corporate captains (several of them are still active) recounting how they met the man and describing the man’s best traits in a festschrift style.

Nevertheless, some of the stories told help readers understand some aspects of government policy in the 2000s. I also become more appreciative how many GLC men and women were Nor Mohamed Yakcop’s men and women. When Najib was at war with Mahathir, and reopened the forex scandal of the 1980s and inevitably found Nor Mohamed as the number one scapegoat, I wonder how these men and women felt. But again, these insights come only frustratingly indirectly.

Finally, the notes themselves are fascinating. I learned one or two things that I took for granted before. I think more importantly, I am just impressed how detail-oriented Nor Mohamed Yakcop was, how knowledgeable he was, and how he was able to explain complex financial transactions in simple terms to the Prime Minister. Very clear-minded.

Categories
Economics

[2723] Is the weaker ringgit contributing to domestic inflation?

I have read in the media of allegation that the weaker ringgit is contributing to the rising inflation in Malaysia.[1]

The allegation makes sense. If Malaysia imports stuff, which the country does, and if the ringgit gets weaker, which it has (at least against several currencies and namely the US dollar), a weaker ringgit should contribute to domestic inflation. In the absence of data, I would support the idea of weaker currency is contributing to inflation.

Except, I am not entirely convinced by the data. In fact, the data is possibly telling me something to the opposite.

I have done some modeling in the past and it is hard to get a relationship between currency and inflation. At least, my modeling skills are not there yet, I would suppose. Even if I ignore all those econometric tests which the models failed, the effect of currency fluctuation under normal times, as I remember from those models, are so small that I would rather ignore them.

But here is something that does not rely on my econometrics. It is more straight forward in answering whether a weaker ringgit is contributing to domestic inflation. There are two possible proofs dismissing the role of the weaker ringgit.

The first is the producer price index (PPI) for imports. Crazily enough, it is still deflating and it has been deflating since January 2013 at the very least:

20140211PPIImportsDecember

One would expect, if the weaker ringgit was contributing to domestic inflation, the PPI for imports would increase and from there, the PPI inflation would somehow transmit to the consumers, affecting the CPI. I have not modeled this but the result for the a priori expectation that one needs to make the assumption that the weaker ringgit is contributing to domestic inflation is not going well here.

The second involves the import value and import volume growth. I have not thought of this thoroughly but if a weaker currency is contributing to domestic inflation, I would expect faster growth on import value than import volume growth. But in December, total import value (the one you see often in the press) rose 14.8% YoY. Volume grew 15.1% YoY. That means imports really are getting cheaper, corroborating the signal from the PPI imports.

So, is the depreciating ringgit contributing to the rising domestic inflation?

No. On the contrary, imports are a counteracting factor against inflation.

Again, this is just a preliminary thought that I just had. If my thinking holds, then I do not think the weaker ringgit is contributing to domestic inflation. At least not yet.

Right now, it seems, the rising CPI inflation in Malaysia is all caused subsidy cuts and domestic demand.

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[1] — A weakening ringgit currency, which is down 1.5 per cent since the start of the year and at five-month lows against the dollar, could add to upward pressure on prices through more expensive imports, and reinforce the case for raising interest rates. [Malaysia inflation jumps as government feels heat over living costs. Reuters. The Malay Mail Online. January 22 2014]

Categories
Economics

[1958] Of will we see the reintroduction of RM1 coins?

Over at the website of Bank Negara Malaysia — the central bank of Malaysia — there is an inconspicuous survey. The survey begins as it should: it informs readers of the purpose of the survey. The purpose is quite simple: to gauge public’s opinion on some possible changes to the Malaysian coins.

A redesigned coin series!

Oh so I thought until I went through the survey. The real objective of the survey is to gauge public’s opinion of the possibility of reintroducing RM1 coins in the market.

Reading through the survey, there is one possible rationale for such reintroduction because one question asks: If the replacing of the RM1-banknotes with the proposed RM1-coin would result in substantial cost savings to the country, which of these statements best describe your preference?

Hard to disagree with reintroduction if that is the rationale but I am wary of flip-flopping policy. Frequent changes to the coins and banknotes can be confusing for mere mortals on the streets.

Not too long ago in this very decade, the RM1 coins were taken out of circulation in favor of RM1 banknotes. If coin-form enjoys cheaper production cost compared to banknote-form, why were the coins phased out of the market?

If the cost of metal vis-à-vis paper or plastic contributes to the answer, I prefer to stick with the current banknotes. Once the economy is out of the woods, prices of metal are likely to go up again. That will again push coins out of circulation in favor of banknotes, if cost is the sole consideration.

But this may be a weak argument on my side. Cost should be a consideration and if BNM can adapt to changing variables, the users should too. Surely for a libertarian like me, opportunity cost is of concern. Furthermore, adaption or re-adaption of RM1 coins is likely to be painless anyway, probably with the exception of those teller machines.

So, adaption is not my main argument against RM1 coins.

The main argument is the weight of the coins. RM1 is probably the most popular denomination for the common people. Having a bagful worth of coins maybe a good idea if the BNM plans to force those lazy bastards who get on the elevator to get to the immediate next floor to do some extra physical movement. For those of us who are less gluttonous in their diet, the extra weight will be a drag.

But that is just me. How about you?

You can help the BNM decides by visiting their website[1] (it is under the Updates section on the right) or directly to a third party website[2] where the survey is actually hosted.

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[1] — Bank Negara Malaysia is at www.bnm.gov.my.

[2] — [Public Opinion Survey: Third Malaysian Circulation Coin Series Project. Bank Negara Malaysia. Assessed April 21 2009]

Categories
Economics

[1803] Of the dramatic decline of the Australian dollar against the Malaysian ringgit

Just several weeks ago, it cost approximately MYR3.00 to get AUD1.00. I know this because I needed considerable amount of Australian dollar soon and I have been watching the exchange rate between the two currencies very closely to figure out when will be the best time for me to purchase the Australian dollar in bulk.

Since then, the Australian dollar has lost over 16% of its value compared to the ringgit. As a direct result, I found whatever cost I need to bare in Australia went down by the same percentage.

The decline is spectacular because of its suddenness as well as the fact that the last time the Malaysian ringgit fared so well against the Australian dollar was over 5 years ago. For this week alone, the dollar lost 8% of its value; on the day after the rate cut was announced, at maximum, it lost 6% of its value compared to the ringgit.

This is definitely a chance for me to buy up Australian dollar cheaply.

I am unsure if I should wait since I am unsure if the Bank Negara would keep the Malaysian rate at its current level. With inflation moderating and the economy slowing down, the Bank might be tempted to reduce the rate. If the interest goes down, the ringgit would likely see some depreciation against the Australian dollar.

Also, with the impressive coordinated rate cuts across the world yesterday, the ringgit has appreciated markedly against the British pound sterling and the Euro, among economies saw a rate cut.

But for those interested in the economic implication rather than my networth, does this mean the Malaysian economy is doing good?

That is hard to say because the exchange rate is not a good measure of economic health. Especially in the case between the Australian dollar and the Malaysian ringgit, it is clear that the rate differential plays a huge part in the depreciation of the Australian dollar rather than the health of the Malaysian economy per se. Indeed, the cause of the depreciation is the confidence crisis faced by the Australian economy and less to do with improvement of confidence in the Malaysian economy on general. This causal relationship becomes more convincing when the Australian dollar is depreciating in large magnitude against its trading partners.

This is an important factor to remember the next time you heard anybody trying to pass off the strengh of the ringgit against any currency, including the US dollar, as a reflection of the Malaysian economy. The relationship between the two is not quite so simple. Before believing that person, among other things, check out what is happening in the other economy first. In other words, check the various indicators of the real economy.

Categories
Economics

[1798] Of a case against pegging the ringgit

Any policy which pays too much attention to the symptoms of an issue while ignoring its root cause only deserves outright rejection. The Malaysian government’s typical response to shortage of goods is one such policy. The shortage is unambiguously caused by a price and supply control mechanism, which prevents prices from adjusting according to prevailing supply and demand, as well as incorporating other relevant information. Yet, time and again, the authorities blame smugglers for the problem. Not that smugglers deserve any defending, but they are but a mere symptom of a control regime. Addressing a symptom is an ineffective way of solving a problem. Another policy which conflates symptoms with root cause is the pegging of the Malaysian ringgit to some currencies.

The rationale of the proposed policy is simple: It is aimed to stop the ringgit from weakening further vis-à-vis other currencies.

The root cause of a weakening ringgit is the economy itself. Although I am unable to exactly pinpoint the causes, I do have a list of suspects and three of them are political uncertainty, fiscal deficit and windfall tax.

The political uncertainty which we are experiencing so far has a lot to do with it. After all, Credit Suisse did advise investors to stay clear of Malaysia due to the political turmoil. Apart from Pakatan Rakyat’s increasingly tiring poker face with respect to their claim of entering Putrajaya, the recent use of ISA continues to send unhelpful signals to local and foreign investors. As a result, money flows out.

The fiscal deficit of the Malaysian government is yet another factor which may encourage capital outflow. Several economists, among them Salant and Krugman, did suggest that persistent deficit may cause capital flight.

This happened to the Indonesian rupiah several years ago as the size of the fuel subsidy ballooned into the Indonesian fiscal deficit. The rupiah dropped to a frightening level and it only recovered after the Indonesian government decided to dramatically cut the size of the fuel subsidy. Unrest ensued, but in the eyes of advocates of the peg, the rupiah was saved.

Another reason for the lackluster performance of the ringgit might be the imposition of the windfall tax. Earlier, the government imposed significant windfall tax on independent power producers. The imposition is no laughing matter because approximately a fifth of the local bond market is made up of papers issued by the power producers.

Such a tax naturally spooked the bond market, shooing investors away together with their money. In the typical fashion of the current administration, however, the windfall tax was scrapped and replaced with something else. While the U-turn was celebrated, the damage had already been done.

Indeed, Malaysia is not the only destination for investment. Once the money is out, there is little reason for it to come back, especially when there are far better options out there. The financial fortresses of Singapore and Hong Kong are not too far away, if distance is an issue at all in this age of light speed communication.

All of the factors need to be addressed if the strength of the ringgit is an issue. A peg, however, does little to address these issues.

A peg basically acts like a wall. Unless the push factors are addressed, pressure against the wall would build up and it would depend on the strength of the wall to prevent a terrible flood. That wall is the reserve of the central bank.

In the case of the peg, the central bank would have to maintain a position with respect to the currencies which the ringgit is pegged against. In times of a weakening ringgit, the bank would need to shore the ringgit up to the predetermined level by reducing the quantity of money circulated in the market. In effect, this would raise interest rates.

During a period of economic crisis, it is typical for a central bank to lower the interest rates by providing liquidity to promote growth in general, or at least to cushion the effect of a downturn. A peg, however, does exactly the opposite.

Borrowing will become more expensive and create an environment not conducive for greater economic activities, with all else being equal. Whereas consumption is required to fuel a flattering economy, a signal for greater savings and delayed investment is sent instead.

Increased savings will, of course, bring the interest rates back down if it gets to the necessary level, but by the time that happens, the economy would probably find itself in better health, removing the urgency for greater consumption.

Besides, a peg assumes that a particular level or band of ringgit vis-à-vis some currencies is more favorable than any other for everybody on average. Though mainstream economics has been accused of simplifying the world through its models, this assumption goes frighteningly further by committing a hasty generalization.

An economy does not comprise of homogeneous members. A strong currency is not necessarily good for everybody just as a weak currency is not necessarily good at all. Exporters for instance would love a relatively weak currency while importers would love a strong currency. It really depends on which side one is on.

The best way to balance the competing demands of various players within the economy is to allow the market to consider all variables to churn out the right answer. Within this context, Governor Zeti Akhtar Aziz rightly dismissed the call to peg the ringgit to the dollar or any other currencies.

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A version of this article was published in The Malaysian Insider.