Thursday, June 18, 2009

Malaysia's Problems V: Weak Currency & RM1 Trillion

Malaysia has a weak currency that is wrecking havoc on the relative values in the country.

Since 1990, the ringgit has weakened by 23% against the US dollar, 17% against the pound sterling and 38% against the Singapore dollar, among others.

The period chosen is arbitrary and hence the percentages are just for illustrative purposes.

The point is that the ringgit has weakened severely among major currencies.

Of course, the momentuous event was the 1997/98 crisis - which was dubbed the Asian Financial Crisis - although nobody has just suggested that it had also been a Malaysian economic disaster.

The economy has not really recovered since then.

Money Supply

I am astonished to discovered that the M3 money supply has now reached RM948 billion at the end of April 2009.

We are only a step away from having a RM1 trillion worth of M3 money supply - which could be reached before the end of 2009!

What happened?

M3 grew at an average growth rate of 8.8% in the last night years from 2000 to 2008.

Starting with an M3 of RM436 billion in 1999, we have of course more than doubled it to MR948 billion in 2008.

There has been aggressive increase in the money supply since 2002 - growing at double-digit rates on average.

The whole upward spiral started with the crash in the ringgit in 1998 and by keeping the currency at low values, the central banks and other financial institutions have been able to revalue their foreign assets at inflated ringgit values.

That increase in the ringgit value of foreign-denominated assets provided the financial institutions a justification to multiply their loans.

Between 2000 to 2005, the loans of commercial banks grew RM231 billion, from RM295 billion - which is a 78% increase.

85% of the loan increase went to the household sector: 47% for residential property, 30% for transport vehicles and 5% for credit cards and 3% for personal uses.

Which means 15% of the loan increase went to the business sector.

Between June 2006-March 2009, loans of commercial banks rose another RM157 billion or 27% in the three years.

About 47% of the new loans went to the household sector: 25% for residential housing, 10% for cars, 7% for personal use and 4% for credit cards.

About 25% went for working capital (which is good), and 6% for the purchase of shares.

But there was not much for business expansion.

Implications

We can see that the problem of the economy is a banking system that is awashed with cash but no ideas.

We have to stop pretending that keeping a weak ringgit will help the economy.

A weak ringgit has devalued the wages and salaries of the common people while foreigners (especially consultants) priced their work in foreign currencies.

This must surely caught a silent satobage of the human capital of the nation - with locals bailing out into foreign outfits.

In the meantime, higher imported prices chewed up the real purchasing power of the general public - which is really a way of rationing the foreign reserves so that big glamourous imports by the government or the GLCs can be made.

There is a sickening collusion by the corporate sector - as if with the banks of all kinds - to defraud the general public by escalating inflation to inflate their paper profits so that their share prices can rise despite poor fundamentals.

Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people.

Further reading from hishamh: here and here and his criticisms here.

5 comments:

hishamh said...

Here's some ammumition for you:

http://www.voxeu.org/index.php?q=node/3666

and my analysis of it:

http://econsmalaysia.blogspot.com/2009/06/currencies-and-current-account.html

I'll have some further comments later!

etheorist said...

hishamh,

Thanks.

The references are indeed encouraging.

Your estimate of RM2.63 to the USD looks reasonable to me.

For those of us who were working in the late 1980s and early 1990s, we were happy with RM2.70 (that has always been in my mind to be the eqilibrium rate) before the short-term capital flows raised it to RM2.50.

The aberrant was the outflow which pushed it down to RM4.80. But before the currency speculators could unwind, the adjustment was killed at RM3.80.

The current dirty float is a serious defect in the economy, as it artificially tries to boost the economy - but prevented it from going further up the value chain.

If you can do further work on it, I shall be happy to learn from it.

(I shall repeat these comments in your blog.)

hishamh said...

Thanks, but the RM2.63 isn't my estimate but from the article. For comparison's sake, the PPP-implied exchange rates for MYR/USD are 1.967 (IMF), 2.105 (World Bank), and 1.28 (Penn World Tables).

Also, I'm afraid I'm going to pick a few holes in your argument too!

Hope you don't mind.

etheorist said...

You're welcome!

hishamh said...

Post is up!

http://econsmalaysia.blogspot.com/2009/06/weak-or-strong-myr-policy-i-say-neither.html