Malaysia Dateline

Najib’s kleptocratic scandals were unquestionably the most talked about topic for 2016, 2017

2017: Relief and recovery for the Ringgit, or more pain and punishment?

While 1MDB and the Prime Minister Dato’ Seri Najib Razak’s kleptocratic scandals were unquestionably the most talked about topic for 2016, it is the Ringgit’s relentless depreciation which would have caused the most pain for ordinary Malaysians.

Over Christmas, I managed to take my family for a week’s holiday in Chiang Mai – our first since I was banned from overseas travel for allegedly taking part in “activities detrimental to parliamentary democracy” in July 2015.

One would have assumed that travelling to the “backwaters” like rural Thailand would have been easy on the pocket. Well, in the past, trips to Thailand did make me feel “richer”. When you walked the colourful and rambunctious street markets, you needed to exercise maximum self-restraint to prevent oneself from having to purchase additional luggage space from AirAsia because everything was “cheaper”.

Not anymore. Now, the Baht-Ringgit exchange rate will automatically keep you disciplined.

As late as August 2014, the currencies were trading at 10 Baht to the Ringgit. Today, it’s 8 to 1. And to rub salt on the wound, the Ringgit ain’t particularly welcomed by our neighbours.

Needless to say, if a trip to Thailand could make you feel kinda poor, a journey south to Singapore would make you feel like a destitute. Think about it, a budget Hotel 81 room in the fringe of the city would cost you just about S$100, or RM310 per night.

Ringgit déjà vu?

So, will we get to see some desperately yearned for relief and recovery of the Ringgit this year?

Ringgit is undervalued? Most pundits are telling us that the Ringgit is undervalued and will recover by the second half of this year. PublicInvest Research said the Ringgit will recover to average between 4.10 and 4.15 for 2015 against the US Dollar, which is currently trading at 4.48.

Dato’ Seri Najib Razak would similarly like you to believe that the ringgit will recover.

“With the recent changes and developments, we are confident the ringgit will recover. It is due to speculation by outsiders and the uncertainties in the United States that the ringgit dropped, and not because the ringgit is weak,” he said in December when the Ringgit traded at 4.42 to the Dollar.

But didn’t they all say the same thing last year? Or for the that matter, the year before?

The Prime Minister told us way back in January 2015 that the Ringgit will bounce back from the then five-year low versus the US dollar as “Malaysia’s financial market is sufficiently robust”. Believe it or not, the Ringgit was then trading at 3.60 to the Dollar, which now seemed like a parallel universe away.

If we had all trusted our Ministers and invested based on his financial advice, some of us would be bordering suicidal tendencies today. 2016 was the Ringgit’s 4th consecutive year of decline against the US Dollar.

The thing is, if everyone else had declined at the same rate against the Dollar, it wouldn’t have felt so bad. What is particularly galling is that the Ringgit performance is the worst among all the major regional currencies.

In 2015, the excuse given was straightforward – the Ringgit suffered more because we were an oil-exporting nation. As the price of global crude collapsed from US$102.10 in January 2014 to US$60.70 (Dec 2014) to US$36.57 (Dec 2015), it is almost understandable that the Ringgit would be disproportionately pummelled.

The pundits had predicted that the Ringgit would recover with the recovery of oil prices last year. They were indeed spot on in their prediction of higher oil prices with the Brent crude trading at US$55 a barrel by December 2016. Unfortunately, despite the oil price reversal, the Ringgit value worsened significantly.

How was that even possible?

No more an export powerhouse

Back in November 2015, the then Bank Negara Governor, Tan Sri Zeti Aziz told an international audience that the Ringgit was “significantly undervalued” as our “export growth remains fairly strong”.

Except it wasn’t.

Conventional economic theory tells us that as our currency gets depreciated, our goods become cheaper and consequently the demand for them increases. A robust increase of the export of our goods and services would in turn increase the demand for our currency and hence provide a strong platform for the recovery of our ringgit and economy.

Well, the Ringgit was massacred in 2015 when it depreciated by nearly 20%. On paper, that makes our exports dirt cheap in 2016. And given that we have always prided ourselves as an export-oriented economy, our goods should definitely be flying off the shelves as they became extremely competitive.

Conventional economic theory tells us that as our currency gets depreciated, our goods become cheaper and consequently the demand for them increases. But the Government’s own statistics tell us that our exports barely eked out a gain. The 2016/2017 Economic Report published in October 2016 tells us that our Gross Exports for January to August 2016 grew by only 1.1%, compared to 1.6% in 2015.

More specifically, the electrical and electronics exports, the pride of our manufacturing industry, grew by only 2.2%, a substantial decline from 7.4% in 2015. While 2.2% might have been just about acceptable under normal economic circumstances, the number is pathetic given the depreciation the Ringgit suffered.

Worse news followed since the above report, when the Department of Statistics disclosed last month that our exports declined 3.0% and 8.6% for the months of September and October respectively.

Separately, the latest Nikkei Malaysia Manufacturing Purchasing Managers’ Index, or PMI which measures manufacturing activities shows that the sector “in contraction territory for 21 consecutive months”.

The headline PMI posted for December was 47.1 signalling continued deterioration. A score above 50.0 signals improvement in manufacturing conditions, and Malaysia has not reached a score of 50.0 since early 2015.

Living and La-La Land

There is no question that our economy is suffering from something chronic which needs immediate treatment. Alarm bells should have been blaring deafeningly in Putrajaya but all we get is Ministers with their heads in the sand.

Prime Minister Najib Razak welcomed 2017 by boasting that Malaysia has achieved a growth rate the Western world can only “dream of”.

“Our estimated growth rate of 4.3 to 4.5 percent for this year is one that developed countries in Europe and North America can only dream of. Malaysians should be proud of the growth we are achieving.”

A statement from the Barisan Nasional strategic communications team earlier in December also boasted that “Malaysia’s economic growth is less volatile and more robust than Singapore’s as a result of the Najib administration’s shift towards the domestic economy.”

Of course the fact that developed countries have a different growth trajectory compared to developing ones was irrelevant. What was more important to the ruling leadership was the continued thumping of the chest to praise and glorify the Emperor in the eyes of seemingly gullible Malaysians, even if the Emperor is really naked.

So what’s really happening?

A loss of confidence

The anticipated explosive growth in exports and manufacturing activity as a result of persistent depreciation of the Ringgit never materialised. Either no one wants to buy more Malaysian products even though they are significantly cheaper or more plausibly, businesses and investors are not investing in additional production capacity in Malaysia.

They are at best adopting the “wait and see” strategy or at worst, have decided in investing their money in other countries. There could be many reasons for this, including perhaps a increasingly limited supply of skilled and quality labour, a weakening education system or the bureaucratic and corruption cost of doing business.

However, anecdotal evidence would tell you that one of the key factors is the fact that they have lost confidence in the country. A country led by a Prime Minister who has been indicted as one of the worlds biggest kleptocrat would and could never inspire confidence in genuine investors.

The complete failure of the institutional authorities to take enforcement actions against blatant and brazen corruption has destroyed whatever that’s left of Malaysia’s long-standing reputation as a country they could do business in.

Bank Negara saves the day?

Bank Negara saved the day Bank Negara Malaysia is now forced to implement increasingly desperate measures to stem to tide against the Ringgit. They now include the restricting the off-shore trade of the Ringgit via non-deliverable forward contracts, and more controversially, the move to compel exporters to convert 75% of their proceeds into Ringgit.

The Central Bank is claiming success for its policies, stating that the measures are starting to bear fruit, following lower volatility in the ringgit. Sure, such short term measures will provide immediate support for the Ringgit as it mops up whatever excess liquidity existing today.

However, as explained earlier, Malaysia being an “export-oriented country” is heavily dependent on continued investments in our export sectors, manufacturing or otherwise. If the use of your future export proceeds are restricted and the hidden cost of doing business in Malaysia increases, then who would want to invest in new or additional production capacity in the country?

Current exporters would not have a choice in the repatriation of export proceeds as demanded the authorities. But they and future investors – both local or foreign – have a choice in where they choose to invest in the future. With alternative competing investment destinations aplenty today, such short-term Bank Negara measures will only further dampen the medium and longer term demand for the Ringgit, jeopardising any eventual recovery.

A new normal

We used to pride ourselves as an export and manufacturing powerhouse. We are used to being described as an “economically resilient” country, even if it was somewhat a function of striking oil lottery, especially during the decade of high oil prices.

Unfortunately, the hard statistics are becoming hard to refute.

I would be foolish to give a specific prediction of how the Ringgit will perform over the next 3, 6 or 12 months even as it hit 4.50 to the Dollar yesterday, a new record low since the Asian Financial Crisis. However, it would be more than fair to say that the downside risks significantly outweigh the upside prospects given the reasons explained above.

For Malaysians, perhaps its time to accept the new normal. We have lost more than 40% of our wealth in US Dollar terms over the past 3 years. The lost of wealth will be reflected in higher prices of goods and services – including the higher price of petrol as oil is traded internationally in Dollars.

Although it is not impossible, this new normal will be extremely difficult to reverse. In fact, it more than likely to get worse given the utter inability by the Najib administration to rectify the failures of the economy.

I would be foolish to give a specific prediction of how the Ringgit will perform over the next 3, 6 or 12 months. However, it would be more than fair to say that the downside risks significantly outweigh the upside prospects given the reasons explained above.

The only way Malaysians can hope for “the good old days” to return is to see a change of regime. The new regime needs to cleanse the country of its kleptocratic reputation and wipe out the scourge of grand corruption from the Government. It needs a new, intelligent economic team which isn’t encumbered by sacred cows decreed by those who are desperate to stay in power at all costs. It really isn’t rocket science.

Then perhaps, we will see a meaningful, significant and sustained recovery of the Ringgit, and our wealth over the longer term.