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Monday, December 30, 2013

MYR, The Gohmen, Interest Rates, Property - The Linkages

The ringgit like any other currency is subjected to swings due to capital flows in and out of the country's economy in line with the global supply of cash. While if you try to google you will get tonnes of bla la lala(s) on what makes a currency stronger or weaker relative to others. There is however one simple answer: it depends on the country's economy. The strength or weakness of a currency is what we 'orang tepi jalan' refer to as exchange rate. Weak currencies (undervalued) means per given local currency you can buy more goods locally than the imported ones. It is the reverse for strong currencies. A country usually tries to make their respective currency stable and this is done mainly via maintaining an economy that is productive enough with a responsible central bank that controls inflation. 

1. Being productive enough
-Tight fiscal discipline (balanced budget...not something we have in Malaysia for the last decade) and anti-inflationary monetary policies (also something our govt is clueless about). Before u "tembak-menembak", note the word productive enough, I did not say the country isn't growing. It is but it is the government spending using debt tremendously since 2008 on commercial enterprises to stimulate the economy and too often has been seen as funding large-scale projects that reward political crony capitalists and support their companies. Malaysia will be unable to move ahead into a higher income level while it remains held back by a lack of tertiary industry, an education system that is falling behind in technological expertise (our PISA results look like PIZZA) and a restrictive low-wage economic model. At least with Maths and Science in English, our kids had a fairly decent chance of moving to a higher income economy. That has just gone out the window. Malaysia's dependence on cheap uneducated foreign workers has depressed local wages and productivity growth. This is why moving forward in 2014 & 2015 the government has resorted to sharp subsidy cuts and new taxes in the form of GST as the only means to increase income.

A strong government with a well-established rule of law and a history of constructive economic policies are the type of things that attract investment and thus promote a strong currency. In the case of the U.S. dollar, its strength is further augmented by the fact that commodities are generally traded in dollars, and many countries use the dollar as a reserve currency which makes it strong even though their debt to GDP is 107% while Malaysia is 54.8%. "Someone said the govt leaders are now like "porn stars". They have no sense of value or shame anymore. They can go naked in public and they don't know they are doing something that is abnormal.". While many nations around the world have their own fiscal problems but none unlike Malaysia where we spend 75% of our budget on 'operating' expenditure and 25% on development needs and this trend shows no sign of abating.

2. Central bank that controls inflation 
-High interest rates help promote a strong currency, because foreign investors can get a higher return by investing in that country. A higher interest rate means a better return on bonds and other Government securities and will, therefore, tend to attract financial capital from overseas (this is called capital in flow). So, if Malaysia interest rates go up – or more importantly, are expected to go up – the Ringgit will tend to strengthen against other currencies, and vice versa. However this is a double edge sword for trading nations because a strong currency is bad for the country's export. Your goods are now more expensive and thus less competitive.

MYR performance against key currencies within Asia exc Japan

The Brunei dollar is managed together with the Singapore dollar at a 1:1 ratio by the Monetary Authority of Singapore (MAS). Singapore is one of Brunei's major trading partners. Without going to much details here's my outlook. Malaysian Ringgit will never catch up with the SGD, in fact it will widen even further as Singapore's moves up the chain from their current manufacturing -> hi-tech manufacturing (telecommunications/satellites/medical equipment). We would be trading sideways between HK/Taiwan/South Korea as these countries are also 1/3 export oriented & trade dependent (similar to Malaysia). I am unsure why we weaken against the Peso but my hunch is due to their outperforming stock market. Indonesia and Vietnam is not surprising as they are gearing up their manufacturing sector for exports and are poised to benefit more from a weaken currency.   

If you are looking to gain from currency the best bet is the Singapore Dollar. Need a vacation? Indonesia and Vietnam are good places for the coming years. And pray that we don't enter an economic malaise (our own lost decade: so we can still be comparable to our other closest economic competitors if not you need to carry your pack on your back.

In fact not all is smooth sailing for the outlook of the Ringgit.
1. We have been lagging behind (not productive enough). Who would invest in the country's stock market if not for the attractiveness & outlook of their economy? Sooner rather than later, we will be overtaken by Indonesia & Thailand in terms of market capitalization.

2005 Market Cap      2013 June Market Cap
Malaysia  184 bn       490 bn  (+166%)

Singapore  227 bn     752 bn  (+231%)
Indonesia 77.6 bn     477 bn  (+514%)
Taiwan  433 bn         754 bn  (+74%)
Shenzhen  125bn    1,190 bn  (+852%)
Philippines  32.4bn    230 bn  (+609%)
Korea  459 bn            3,051  (+564%)
Thailand  122 bn       408 bn  (+234%) 

2. If RM weakens further due to US tapering our central bank might need to raise interest rates later to keep it afloat but this is also difficult as it could potentially pop our debt bubble. But property bubbles do not get pricked so easily. When low interest rates is prevailing and other sectors of the economy are so weak, central banks cannot just raise rates to dampen property speculation as the broader economy will get hurt. This is the MAIN REASON why our budget is putting measures that are property sector specific. E.g. DIBS removal and the RPGT. We have been living on cheap credit for a very long time (causing loans to be growing at amazing rates) which is dangerous and interest rate adjustments were originally meant to be used as a short term financial tool. Our clueless PM... also the finance minister is punishing the devs instead by imposing the above when property seems to be the only growth industry in the country now. The overheating of the property sector is often caused by the Bankers - not the property devs. The Bankers make crazy property loans. It is better to increase the Bankers "prudency" in making property loans. HK and China did it and yes it will correct the house prices to an extent (30-50%) but it will NOT kill the property sector.

3. Our trade reliant country needs a balanced currency because a weaken ringgit also means Malaysian companies have to pay more to import large machines and construction equipment, or so called capital goods. With Malaysian carriers taking deliveries of airplanes and construction companies importing heavy cranes to build new skyscrapers like Warisan Merdeka, the country’s import bill is bloating, which will only swell with a falling ringgit. 

On a side note: Not that I actually believe it in this but have you heard of the
"The Skyscraper Index is a concept put forward in January 1999[1] by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein,[2] which showed that the world's tallest buildings have risen on the eve of economic downturns.[3] Business cycles and skyscraper construction correlate[4] in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession."

As you can see walk left also wrong, right also wrong, up pun 'salah' down also 'tak betul'. Our narrow based economy has little room to maneuver and because we were one of the best performing currency (together with Thailand as well) when QE started back in 2009, our fall might actually be as bad as the rise. A lot depends on what the US fed will do whether they decide to taper even more. I think our time of cleansing would be happen when interest rates go higher. BNM would do whatever it takes to keep interest rates at current levels for as long as it could with our rm440.8 billion reserves as our only weapon left to fend of a falling Ringgit. No rocket science people...just need to stop playing Dota and catch up a little more on news (US Fed moves, BNM news, Budget announcements and most importantly what's coming out from the mouth of our clueless PM). 2014/2015 are going to be tough years for all of us.

Here is my conclusion: Time to be aware of what is happening

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