Weak Ringgit does not reflect Malaysia’s sound fundamentals

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Minister in the Prime Minister’s Department in charge of the Economic Planning Unit (EPU) Dato’ Sri Abdul Wahid Omar makes a point to the audience whilst Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz looks on.Minister in the Prime Minister’s Department in charge of the Economic Planning Unit (EPU) Dato’ Sri Abdul Wahid Omar makes a point to the audience whilst Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz looks on.Minister in the Prime Minister’s Department in charge of the Economic Planning Unit (EPU) Dato’ Sri Abdul Wahid Omar makes a point to the audience whilst Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz looks on.

Malaysia’s fundamentals are strong yet there seems to be a trust deficit. Is there a crisis of confidence in the Malaysian economy? Why did the ringgit fall so hard so fast? – Panellist at Malaysia’s Economic Update 2015, a forum organised by Economic Transformation Programme (ETP), were asked these questions and more.

Mustapa

MustapaMinister of International Trade & Industry Dato’ Sri Mustapa Mohamed (pic) maintained that there is no crisis of confidence.

“I think people look at the longer term. There are some challenges, of course. No country is devoid of challenges. We have to move on…. it’s important to have closure and that will be done as quickly as we can. The government recognises that that’s a problem and we have to find closure for this subject. We have fine institutions, improvements in corporate governance… People look at the medium and longer term picture.”

The Performance Management and Delivery Unit (PEMANDU) CEO Dato’ Sri Idris Jala said the issue of political funding needs to be addressed for the country to move forward. PEMANDU had in 2010 recommended the reform of political financing but it did not gain traction as both the ruling and opposition parties would only do it if the other side agrees. “If that reform had been accepted at that time, we would not be in the quandary we have today.”

Minister in the Prime Minister’s Department in charge of the Economic Planning Unit (EPU) Dato’ Sri Abdul Wahid Omar attributed the ringgit’s steep depreciation to “three plus one” factors.

“Firstly, Malaysia is an emerging market. Therefore when there’s a reversal of investment flow back to US economy, we were affected. Secondly, we’re still a net exporter of oil & gas. When oil prices came down, we were affected. Third, China is also our largest trading partner. In 2014, 14% of our trade was with China. For the first seven months, about 15%. When there’s moderation in the Chinese economy, Malaysia will be similarly affected. And domestic sentiment issue compounded the impact,” he said.

Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz added that expectation that the US will finally lift its the zero-bound interest rate which had been in place for seven years now also contributed to the strengthening of the US dollar and when that did not happen, there were retracement and recovery in some of the other currencies.“External developments like this affect countries like us that are highly open.”

She believed that if China did not undertake its restructuring and rebalancing initiatives to make its economy more sustainable, the global economy would be more vulnerable in the future.

Mustapa believes that overall, “we might gain from this currency situation”. “One has to do a thorough assessment in terms of costs and benefits. But for exporters – we are talking to many of them – they are beginning to see some positive impact from this situation for the medium and long term.”

The weak ringgit certainly does not reflect Malaysia’s strong fundamentals.

“We have been one of the best-performing economies for more than five years now. Our macroeconomic fundamentals are strong. We have a solid banking sector; not at any period was credit growth disrupted,” Zeti reiterated.

Pronounced movements

Among the reasons for the steep ringgit depreciation, aside from Malaysia being an open economy, is the fact that our financial markets are larger and more developed – the largest in Southeast Asia.

“This invites inflows. And where there are reversals, we feel more pronounced movements in these flows and more pronounced movements in the exchange rates. If you actually retrace when currencies strengthen, ours was one of the ones that strengthened the most. And of course now when we have a reversal, it is one that experienced the most depreciation,” Zeti said.

She said volatility is inherent and everyone has to manage themselves to live in such an environment. “That’s why we [BNM] build buffers for our reserves. That’s why we work so hard to make sure our financial system is resilient, so we can withstand this. Businesses need to do the same. And now, households need to do that as well.”

Zeti highlighted that Malaysia has successfully diversified its economy. She said that the fact that the economy was export-led but now our domestic-driven is very important when things slow down globally. “The average 5% growth in the recent five years is driven by domestic demand,” she said, adding that the economy was no longer investment-led like it was in the 1990s.

Meanwhile, Malaysia has been registering record investment numbers every year since 2010, with a CAGR of 13.6%. Pre-ETP, from 2006 to 2010, it was only 5.5% CAGR. This year should also be a record year, said Idris.

Idris

IdrisWhen asked if he is confident Malaysia will maintain that record growth, Idris (pic) said investments approved by MITI have also been at record high in the past three years and when those go live, it will lead to a record high.

“However, there will be some adjustments, for sure in oil & gas. If you look at investment in upstream, principally in marginal oil fields and small fields, I think those are no longer commercially viable when prices are below US$50 a barrel so some of those will be postponed. But most of the big bets in downstream – the Pengerang project – is spot on. With low oil prices, the downstream sector in oil & gas is really lucrative,” he said.

“Our strategy of focusing on what Malaysia has competitive advantage in is right. The 12 NKRAs [National Key Results Area] are areas where Malaysia has inherent competitive advantage. I think the investments will continue,” he said.

“I’m rather sanguine and positive going forward for Malaysia. It would be rocky here and there and people being nervous about investments. But on the whole, I think we’re very steady,” said Idris.

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