Thursday, August 13, 2015

Ringgit Management

I wish to write on the behaviour of the ringgit and what we should and should not do in managing it.

1. Global Structural Change

I wish to emphasise that it is not only the ringgit that is weak but all currencies except probably that of the US and the UK.

This is a major change in the global economic fundamentals, or a global structural change.

The major change is that the US has finished with quantitative easing (QE) of the last three decades in order to shore up the US economy which was really in trouble. The US could and can print money to buy goods and services for free because everybody else is willing to hold the US dollar as the currency reserve. Japan and then China were the main accumulators where their people worked their lives off in return for a miserable living wage and inflation whilst their corporates became cash rich. The QE exported inflation to the whole world as the US tried to steal resources from everybody else for its own consumption.

But the real improvement in the US economy came when the US used its trump card of introducing shale gas, as a means to fight off Russia and possibly the Middle East. The US increases the supply of oil in the global market and this cuts the price of oil by almost half.

The two major effects are: (a) the US economy recovers because of the increase in output chiefly from shale gas production; and (b) the drop in the cost of doing business in the US and elsewhere.

For major oil producing countries, particularly the Middle East and Russia including Malaysia, oil revenue drops and this cuts government revenues and raises government deficits. This creates new budgetary problems and how they are tackled have great political implications as they will affect deeply the pockets of the average consumer.

Since the interest rate has been near zero for so long, the only movement for it is up. The question is when is the interest rate going to go up. The answer is" "Anytime now, when the US economy has seen to have recovered." As the UK economy has also been improving as a result of austerity, the UK interest rate is also set to rise as well.

Since the rest of the world seems so miserable, with China and Australia down and the marginal EU economies in debt troubles, the US and the UK seem to be the only two bright lights in the world for those with cash.

2. Regional Currencies

It is a bane of the economic policy of developing countries that they see the stock market as the main measure of the libido of an economy and hence political cleverness in economic management. This is utter rubbish.

The performance of the stock market is not the direct measure of the healthy of an economy. There is an indirect and tenuous relationship between the stock market and the fundamentals of an economy.

But there is a direct relationship between the stock market and the liquidity of an economy. The stock market will always go up whenever there is an increase in the excess liquidity of the economy, in the economy is closed or there are currency controls to keep the excess liquidity within the domestic system. If there are no foreign exchange controls, then an excess liquidity or an increase in excess liquidity will also lead to a depreciation of the currency.

It is therefore inevitable that when there are no more fools in the stock markets, the speculators will sell off the market and take their money and their profits out. A weak stock market and a weak currency always go hand in hand.

(Likewise, we have heard so much foolishness in the past when increased speculation in the stock market was welcomed as a sign of a strong economy argued on the simultaneously strengthening of the currency just because foreign fund managers were coming into the local market to cream off the local speculators.)

The worst that we have seen about increased excess liquidity was when banks and financial institutions were left to lent indiscriminately to fund asset inflation in real estate which are being used as collateral for the loans. There is no great madness than this, to allow banks to create their own collateral values for their loans at the expense of the average savers who were and are being paid nothing for their austerity and thrift.

No doubt the global impact of the US QE has been so great that it would have been impossible for local monetary authorities to sterilise short-term capital inflows. But there must be attempts to limit and restrict these disruptive flows as much as possible, as the police for examples must try to reduce a spate of crimes no matter how rampant. There were no signs of warnings and lecturing to reckless bankers, and everybody seemed to enjoy surfing the wave so long as they have a nice surf board to ride. Everybody else simply got drowned in high waters.

So the speculative funds which have had enough of ravaging the regional bourses, look up and see the two bright spots in the distance and decide to find new pastures. This the another global structural change in thinking.

3. Speculative Momentum

When we are talking about a major structural change, we are not talking about a person going to the toilet during a show in a theatre. We are talking about the entire audience leave the theatre because the show is over. One by one, they got up of their seats and head for the exit door.

Because of the enormous size of the audience, because the show was good, there appears to be a major exodus. And this probably brought the index to 4.

Well, let's see who is going to shout "Fire!"

You know it is very tempting to make that shout. How else can one think, to see everybody leaving, and may be you want to capitalise on it. You are way back in the queue and you have an urgent need to go to the toilet. You are dying for a cold drink. Whatever. You want to move the crowd faster. You want to change the scenario for your own gain.

Very tempting.

4. Currency and Democracy

If you believe in freedom of movement, in freedom of choice, in freedom of gains and losses, then you should let the ringgit be.

The ringgit had been glorious, and went to as high as 2.50. The many waves of speculative foreign inflows had made everybody in Malaysia rich, lifting the standard of living to unprecedented heights and be among the best consumers in the world. We have paid for all these with our oil money and many Malaysians now have the luxury of freely sprouting their views without thinking, though not without agendas. We have learned to be wealthy without working, though not worthy maybe.

Where the ringgit is today is a good reflection of the underlying fundamentals of the economy. Not exactly but thereabouts. More swings are to be expected as the currency market tries to find a fair value for the ringgit. This takes time. Many factors have to be considered, factors now and factors in the future.

At the moment, the last show is over and let's see what is the new show going to be. In the meantime, we all adjourn to another venue.

There are calls for us to get our act together. To start a new, not to replay an old one. The squabble is now over who is going to be the main actor, the star. There is intense competition among producers, over genre as well. Tragedy? Farce? Special effects?

The last thing we should go for is to shut the door and lock those who haven't exited inside. This will create a major loss of confidence.

The call to fix the exchange rate is not without its cost. If there is really a major exodus, then you are threatening to deplete foreign currency reserves which when it is depleted will mean a freefall for the currency because then there will be a total loss of confidence in the ability of the central bank to defend it under any circumstance.

5. Independence of the Central Bank

The independence of the central bank is a sacred doctrine of economists who wish to control inflation.

The head of the central bank is usually called the governor, which means almost like a head of this monetary world.

In principle, the governor of the central bank is to be able to say to the finance minister whose job is to manage the finances of the state that their is a limit to the spending by the government. The government of any country is a sovereign entity but not the head of the government, say the prime minister. The prime minister is keen to stay in power as long as he can, if there is no limit by law. As economies go through cycles, there is a tendency for the head of government to spend his way out of his economic problems. The job of the central bank government is to define that limit for that person heading the government.

We have already compromised the fiscal integrity of this country by having the prime minister taking up also the position of the finance ministership when these two posts should be separated.

If the independence of the central bank is lost, then we fear that the consequences will be dire: high inflation and a weak currency. Socially, poverty and confused social groups.

We need the governor of the central bank to be independent and strong.

6. State of Economy

We have gone past our golden age. The good life of a simple plantation life is over. The good life of an oil-rich economy is over. We have spent it all and we have destroyed the goose that laid the golden egg. We need to find a new economic force.

I am tired. Maybe we shall deal with this another time. Big topic.


Anonymous said...

I've only just discovered you.
Thank you for this article. You write it simply that even I, a third year history student, can understand.
I'm quite taken up by the last para. The one about the prime minister also holding the post of finance minister. I remember reading somewhere sometime ago of Tun Daim saying the same thing.


walla said...

1. Everything is academic when the country has been hijacked. The plane is on auto-pilot and running out of fuel. At best it will glide to a stop somewhere; at worst, a crash. Now everyone can fry.

2. All my naysaying observations, analyses and hunches have turned out to be true since way back. Let alone here, and even much earlier than the 90s. When the economy was doing well in distant memory, i was already worried in a contrarian way whether we had any real fundamentals that would pave the foundation for our future.

3. People were and are still trying to make money as fast as possible by short-cuts if not repetitive uninspiring work; there was and remains a dearth of serious investing in the future of their enterprises in such a way as to encourage and energize new value-creating re-investments by later generations.

4. So finally and unsurprisingly this place has found its own trite level; we don't need to articulate its characteristics for one can see as much in other countries which have failed and stagnated but at the cusp of some success soon to become painful for the fact they could have been the bricks to take matters higher.

5. What's next is the easiest question to ask but it faces the hardest answer to make. The hijackers have made it impossible for anything to be believed and trusted from now on. What is official will remain suspect and what is from the market will remain blurry.

6. So people will do their own thing. Essentially this means scale-up's will be nigh impossible because those with funds will offshore them.

7. Now we can understand why retirees try to take things easy by talking about food. It gives them a few minutes each time where they can turn off their minds from ponderous matters, not that all the thinking will amount one iota. Neither the consumption.

8. We have all tried to care for one another as people per se, and for all communities in a sustainable and wise way. It would not do to just go through the motions of being purely civil and civic. Given the recurring challenges, it was necessary to try and construct a road out of the quagmire of low-level flunky politics that is the baggage brought on-board by the hijackers.

9. It remains to be thankful for small mercies, to carve our own little corners of jingoistic happiness, to nurture skepticism in order to inure from future disappointments, to help as many as we can care save as much as they can save in order to afford their one chance to change their own lives anywhere.

10. Any new economic force will have to be constructed to maintain momentum in tempo with any new global structural economic change visited upon the clueless and the innocents inasmuch the learned and the wise. In our case, the above nine points at the least as well.

This is not pessimism but the reality of cold hard facing up to facts.

walla said...