Meaning the Malaysian Ringgit is hitting its 26-year low today largely because the US$7.5 trillion daily-foreign-exchange-market has increasingly lost confidence in the Malaysian government. Make no mistake – the FOREX doesn’t care about anything except the country’s policies.
If it was entirely external factor’s fault that the Ringgit is being dumped, how do you explain that neighbouring Singapore dollar has appreciated against the greenback? The Malaysian currency has slid by over 4% so far in 2024, and in the last 12 months, it is the worst currency in the Southeast Asia – losing 6.57%, almost double the second worst currency Thai Baht.
Making money in the forex (foreign exchange) is quite easy – just listen to research firms such as MIDF or Malaysian Industrial Development Finance, and bet the opposite. Led by a bunch of clueless management and researchers, the firm that specializes in development finance, investment banking, and asset management provides the best advice for investors to make truckloads of money.
For example, about two weeks ago, MIDF Research confidently said the local currency is expected to strengthen towards 4.20 against the U.S. dollar by year-end. It argued that the appreciation of the Ringgit will be supported by a decrease in interest rate differentials between both currencies, betting that the U.S. Federal Reserve would cut its interest rate. It also bet China’s economy is expected to recover.
While it’s only February, you don’t need to be a currency scientist to see how pathetic and ridiculous the research house’s projection is. Yesterday, the Ringgit briefly breached 4.80 against the dollar – its weakest level since reaching an all-time low of 4.8850 in 1998. Worse, China’s consumer prices fell at their fastest pace in 15 years in January 2024, forcing it to cut 5-year loan rate to 3.95% – the largest one-time cut.
It seems the Ringgit is screwed – regardless whether the U.S. raises its interest rate or China cuts its interest rate. While the U.S. and other Western economies struggle to bring down high inflation, China is facing the opposite problem – deflation. In the U.S., people continue to spend despite prices hitting the roof. In China, people refuse to spend despite falling prices.
Last month, the Fed decided to hold its benchmark borrowing rate in a range between 5.25% and 5.5%. The consumer price index in January 2024 was 3.1%, down from 3.4% in December 2023. However, the inflation rate was higher relative to a year earlier (January 2023). Meaning the inflation was hotter than expected and many Americans are still feeling the pinch.
The US Bureau of Labor Statistics revealed that the index was driven higher in January by the rising cost of shelter, motor vehicle insurance, and medical care. Although the inflation rate has dropped from its 22-year high, the Federal Reserve has made it very clear that they won’t cut the interest rate until it is “more confident” that inflation is moving “sustainably” to their target 2%.
In fact, the Fed had dropped many hints since last year that they actually had no idea whether it should cut the interest rate or not. They fear that if they cut rates now and inflation re-accelerates, then the Fed could be forced to raise rates again, making them very foolish. The problem is the economy and the job market appeared to be booming despite the current high interest rate.
So, what if the U.S. economy continues to grow and thrive even without any rate cuts? Some officials argued that since everything looks good now (low unemployment, booming economy, lower inflation), the Fed should leave the current high interest rate as it is without any urgency to aggressively cut it. This could be the magical “soft landing” the Fed was looking at.
However, other officials argued that the longer the borrowing rates stay at the current high level, the higher the risk that many companies and consumers would stop borrowing and spending. This could weaken the economy and potentially sending it into a recession. In its balancing act, the Fed most likely will delay the rate cuts as it has no need to rush to reduce borrowing costs.
This is not the first time MIDF got its projection upside-down. The research house said last March the Ringgit will reach RM4.00 against the U.S. dollar by end 2023. When that did not happen, the clueless analysts said in Oct 2023 that they were still confident that the currency will end the year at least at RM4.30. Of course, it got it all wrong as Ringgit was the worst currency in Asia after the Japanese Yen.
Joining the bandwagon of ignorance, the central bank – Bank Negara Malaysia – said the Ringgit’s performance does not reflect the country’s economic strength. The clueless Central Bank Governor Abdul Rasheed Ghaffour, like a broken record, has blamed external factors such as the U.S. interest rate, geopolitical concerns and uncertainty surrounding China’s economic prospects.
Like MIDF, the central bank insists that it expects the local currency to appreciate this year based on the assumption of an improving global economy, the government’s commitment to implement structural reforms, and the expected lowering of interest rates in advanced economies. If this is the best Bank Negara can do, perhaps PM Anwar should hire a primary school student as its governor.
Here’s a question for the central bank. Why did the currency surged by 1.8% right after Anwar Ibrahim’s appointment on Nov 24, 2022 as the 10th Prime Minister – the largest single-day gain since March 2016? It appreciated from RM4.74 to RM4.24 (30 Jan, 2023). For two months, the Ringgit strengthened tremendously due to foreign investors’ confidence in the new leadership.
The same external factor – investors’ confidence – then drove the currency from RM4.24 to the current RM4.80. Meaning the Malaysian Ringgit is hitting its 26-year low today largely because the US$7.5 trillion daily-foreign-exchange-market has increasingly lost confidence in the Malaysian government. Make no mistake – the FOREX doesn’t care about anything except the country’s policies.
If it was entirely external factor’s fault that the Ringgit is being dumped, how do you explain that neighbouring Singapore dollar has appreciated against the greenback? The Malaysian currency has slid by over 4% so far in 2024, and in the last 12 months, it is the worst currency in the Southeast Asia – losing 6.57%, almost double the second worst currency Thai Baht.
All the countries in the region – Singapore, Thailand, Vietnam, Indonesia and the Philippines – faced the same external factors blamed by Malaysia. Yet, their currencies did not drop like the Ringgit. It was so bad that three out of four (75%) Malaysians working and living in Singapore are skilled or semi-skilled workers, thanks to brain drain as a result of racism and discrimination policies.
Yes, unlike Singapore’s good governance and strong monetary policies, which allowed the country to follow suit when the U.S. started raising interest rate, Malaysia had to halt its interest-rate hikes at 3% compared to U.S.’ 5.5%. It makes Singapore a more attractive destination for capital compared with Malaysia to investors interested in parking their money.
The fact that the Ringgit hit a record low against Singapore dollar proves that the weakness of local currency cannot be blamed on high interest rate in the U.S. or on the low borrowing rate in China. It’s due to the low demand for the currency in the international market. In 2023, Mainland China, the United States and Malaysia were Singapore’s top trading partners.
Therefore, the Chinese economy will affect Singapore the same way it impacts Malaysia. While China, Malaysia’s largest trading partner, contributed 17.1% to the country’s total trade in 2023, the world’s second largest economy accounted for 10.1% of Singapore’s total trade in the same year. The best part is Singapore’s economy only grew 1.1% in 2023, but Malaysia’s growth was 3.7%.
In 2024, Malaysia believes its economy would grow stronger at 4%-5%, whilst Singapore growth forecast is merely 1%-3%. Yet, the Ringgit becomes increasingly worthless while the Singapore dollar becomes the gold standard in the region. The fact that the Bank Negara Malaysia Governor could only offer childish excuses speaks volumes about the country’s incompetence.
Sure, blaming the Chinese sagging economy is the easiest way out. However, that won’t stop foreign investors from avoiding the country like a plague. Why should foreign investors believe in the Ringgit when even local exporters have very little faith in the local currency, refusing to convert the revenue generated from exports into Ringgit because they believe it is doomed?
In truth, the investors do not like Anwar government’s excessive religious politics as it shows the unity government was fragile. They don’t like the emergence of radical Islamic politics, which is growing stronger with each passing day because the government was too afraid to take the necessary actions to nip it in the bud. And they certainly don’t like Anwar’s anti-corruption empty rhetoric.
In truth, the investors do not believe the Anwar Administration is capable of fixing the balance deficit, which is growing faster than a speeding bullet, let alone reducing the RM1.5 trillion national debt inherited from previous corrupt administrations. To pay the salaries of the 1.71-million bloated civil servants alone, RM95.6 billion (24.3% of Budget 2024) was needed.
Retirement for government pensioners would burn another RM32.4 billion (8.2% of Budget 2024). Worse, in order to appease the government staffs, 90% of whom are Malay voters, Prime Minister Anwar Ibrahim has agreed to increase their salary. Without political will to downsize the world’s most bloated civil service or to scrap the pension scheme, it would only drain the national coffers.
The pause on the overnight policy rate (OPR) hikes was a mistake as it intensifies capital outflow to take advantage of higher returns in the United States. But the policymakers have no choice because to raise interest rates further could kill local businesses. However, the damage could be worse as the worthless Ringgit will make imports so expensive that it could also kill consumption and local businesses.
Prime Minister Anwar can scream till blue in the face about de-dollarization, Palestinian solidarity program, Bumiputera Economic Congress, dubious reforms, RM347 billion in FDI (foreign direct investment), Madani Economy and whatnot. But the investors are not stupid. They could judge after a year whether he is a reformist or just a chameleon who tries to please everyone without achieving anything.
In reality, his government’s approval ratings have plunged to 41% in 2023 from 61% in 2022. The trumpeted RM347 billion FDI and de-dollarization are distant water that can’t quench a fire nearby. In reality, investors could see how the Palestinian solidarity program in schools exposed schools exposed the existence of radicals and extremists in the education system.
In reality, investors do not believe in Anwar’s reforms after Deputy Prime Minister Ahmad Zahid’s 47 money laundering and corruption charges were thrown out, followed by 50% discount “royal pardon” for former Prime Minister Najib Razak’s 12-year jail sentence. More importantly, investors have no confidence that Malaysia will not turn into a Taliban state after the next 16th General Election.
Source : Finance Twitter
The Coverage Malaysia
