As we say in BM, “mamat ni ketinggalan zaman” (excerpt):
Malaysia is expected to experience two to three years of slower growth rate due to the current stifling economic conditions, says independent analyst Prof Dr Hoo Ke Ping.
Pointing out that Malaysia’s current foreign reserves had depleted significantly since the 2015 Budget was tabled, the government and its people must be prepared for the worst case scenario.
Just before the tabling of the 2015 Budget in October, Hoo said, the country’s reserves were estimated to be around US$130 billion (RM462 billion), but in four months’ time it had gone down to around US$100 billion (RM355.4 billion) due to the shortage of US dollars leading to “illiquidity crisis”.
This, he said, was due to the fact that Malaysia as an oil-commodity based nation was struggling to control the outflow of US dollars following the plunge in global crude oil prices.
Hoo said that as other analysts had predicted that crude oil prices could fall even further to a low of US$40 (RM142) per barrel in the next six months, national petroleum giant Petronas, which remains a key contributor to the government’s revenue, would contribute less to sustain economic growth.
“Malaysia’s foreign reserve earnings are through four main sources. The first is oil which is the main source, has suffered a huge loss. The second is palm oil, whose price has dropped to roughly RM2,600 per tonne, making earnings look stagnant and third is tourism....
This “analysis” might have been somewhat true under the Bretton Woods regime of fixed exchange rates, though it would be thoroughly mangling the transmission mechanism between trade in goods and services and foreign exchange reserves.
Only problem is, the Bretton Woods system broke down in 1972, and fixed exchange rate regimes have seen a steady decline since. For Malaysia, the USD peg that prevailed between 1998-2005 would also have made this somewhat true, but since we’ve been under a floating rate regime ever since, it is almost wholly wrong.
Under a floating rate regime, increasing foreign exchange reserves is an entirely discretionary decision of the central bank, irrespective of the volume of trade, or whether trade is in surplus or deficit. You can do it any time you please (or not), with the proviso that any such action will have consequences for the market exchange rate and domestic monetary conditions. Why? Because the flip side of increasing reserves is increasing the money supply i.e. printing money.
In fact, under a fully floating exchange rate regime, you don’t even need foreign exchange reserves. It’s simply not necessary. The market exchange rate just adjusts to clear demand and supply. FX reserves are only desirable, as in Malaysia’s case, when you want to have foreign exchange on standby if market conditions get wild, as they did over the past month. The link between FX reserves and economic growth is even more tenuous.
I’ve complained about this before – almost since this blog came into existence – but some of our “analysts” really need to keep up with the times.