More to ringgit slide than politics

Adam Reza, Malay Mail Online

It’s been a tough year for the Malaysian ringgit and its recent depreciation has raised plenty of concerns.

How did this happen and why now?

Many Malaysians have chosen to blame it on politics. In fact, both sides have blamed constant politicking for giving out negative signals that have scared off investors.

This is something I disagree with and I say this as a Malaysian who’s also enraged at our politicians.

Without downplaying the disappointing state of Malaysian politics, the fact of the matter is that the situation we find ourselves is largely intertwined with a series of external factors.

It’s also a situation that spans the entire globe.

Thus, regardless of whether BN or PR was in power today, it’s a storm that we would still have to contend with.

Now before you dismiss this claim, consider these global trends.

In the last year alone, our fellow resource based countries such as Australia and Canada have seen their currencies plunge as much as 10 per cent against the US Dollar.

Now these are hardly rogue nations. In fact, these are democracies that many Malaysians would aspire to emulate.

Yet they’ve been hit just as bad despite their relative political stability, underscoring how the crisis today is more complex than mere “political uncertainties”

But if it isn’t merely “political uncertainties”, what’s actually driving this rout?

Firstly, we need to consider what’s currently happening in the United Sates.

In the aftermath of the global financial crisis of 2008, we lived in a world where US interest rates were virtually at 0 per cent, in turn prompting investors to look to emerging markets for returns.

It was a boon for emerging markets and a significant side effect was the unprecedented upswing in emerging market currencies.

Yet recent times have seen an improvement in the US economy, leading the Federal Reserve Bank to consider raising interest rates again.

It’s this move that has triggered a sell off in emerging markets, leading to a decline in currency rates.

Nobody has been spared.

Thailand’s baht, Indonesia’s rupiah and even Singapore’s dollar.

All these currencies have seen record lows.

The second factor has been the decline in commodity prices that has seen the currencies of commodity exporters taking a beating.

In fact, the effects of this drop have been so extraordinary that even previously “immune” economies have also been affected.

Norway has seen unemployment peak to levels much higher than the 2008 global financial crisis and the krone has declined by up to 12.5 per cent against the greenback this year.

Another oil dependent economy Saudi Arabia has been forced to borrow for the first time in 8 years.

As if things couldn’t get any worse, a third factor – readjustments in the Chinese economy, have been just as influential.

This is underlined by the recent drag that the devaluation of the yuan had on China’s trade partners, most notably South Korea, Taiwan and South Africa.

It’s clear that these are challenging times. But while many economies will have to contend with maybe one or two of these factors, Malaysia is largely exposed to all three.

We’re an emerging market, a commodity exporter, and China is an important trade partner.

Given all of this, will we be able to weather the storm?

I believe we can.

For a start, my optimism shared by UBS investment bank, which expects the ringgit to appreciate by 5 per cent. Oil prices eventually have to rise as well, and this will certainly help the ringgit.

We’re also not in as bad a situation as we think. Indeed the worst performing economies have been pinpointed in Morgan Stanley’s fragile 5 and troubled 10, which takes into consideration currency movements, growth rates and deficits.

We’re still way off from being included in this group and that is a good sign.

We’re also in a strong position having learned the right lessons from 1997.

We have a floating exchange rate and a current-account surplus. We still have foreign exchange reserves and our banking systems are stronger.

Yet despite this we it is of the outmost importance that our leaders are on the ball.

Thus it comes as a relief that Zeti Aziz will continue on as Bank Negara Governor. The recent establishment of the economic committee that includes fierce critics such as Nazir Razak is also a move in the right direction.

Yet, the Finance Ministry must be more vocal in sending the right signals to calm the market down. With this, we could certainly do away with non-related ministers gaffes.

If we get these things right I am confident that we can weather the storm.

And if history teaches us anything it is that Malaysia and the Ringgit has always been able to come back stronger from tough economic times.