Thursday, August 13, 2015

What To Do About The Ringgit

My advice to BNM and the government, not that they need it, would essentially be the following:

Posted by hishamh at 8:30 AM
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13 comments:

  1. AnonymousAugust 13, 2015 at 9:38 AM

    Hahahahaha....sure nice to start off the day with.Nice crisp video. Thanks dude for the fillip. And the lyrics are cryptically meaningful, aren't they?

    You sure got taste man.Got to hand that to you. ; D

    By the way folks, cheer up. I get this nagging feeling that the Feds will ease off from jacking up them rates after all. Too much for them to lose especially their well connected firms, TPPA, anaemic growth and all...

    http://www.foxbusiness.com/industries/2015/08/12/china-damage-spreading/?cmpid=edpick&google_editors_picks=true

    so they may opt to keep it going but it could be my wishful thinking anyway but there is that gut feeling so hope springs eternal. Who knows?the MYR will vault back to 3.50 this evening and from there the only way is up unlike snowflakes...hahahahahaha

    Anyway, if and when does the unwinding happens, whats your opinion on the private sector debt mountain. Not many folks talk or know about that given their concern for all things pubic...errr...public!. Malaysia is no 3 in there breathing down Singapore's neck. I know much of it is in Ringgit denominated stuff (correct me if I am wrong)....but all things "chainy" started small didnt they (including subprimes....hahahahaha)

    A penny (now thats something very valuable right now, aint it?so i will make that a farthing....sorry no small change in other denominations my pockets hahahahaha) for your thoughts:

    http://www.ft.com/cms/s/3/7c0a4fc2-3f55-11e5-b98b-87c7270955cf.html

    Warrior 231

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  2. AnonymousAugust 13, 2015 at 10:19 AM

    See, the US has got cold feet already:

    http://www.reuters.com/article/2015/08/11/markets-money-idUSL1N10M14X20150811

    In the end when push comes to shove, no one is gonna jump as the waters are too freaking frigid. So they will keep the baloney going on until reckoning comes knocking.

    Warrior 231

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  3. LizarazuAugust 13, 2015 at 10:53 AM

    Well maybe you should try Let it Be - Beatles

    https://www.youtube.com/watch?v=XsQsOjaVUuA

    ReplyDelete
  4. AnonymousAugust 14, 2015 at 8:57 PM

    aroma teraju x destini berhad

    ReplyDelete
  5. AnonymousAugust 14, 2015 at 10:12 PM

    I thought you mean 'Frozen' or to freeze it (pegging, capital controls) when I just looked at the title.

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  6. RizalAugust 17, 2015 at 3:29 PM

    Hi Hisham,

    Not an expert in economics here. I totally agree with you that they should let go off the currency. That's the best way to adjust. However, I am just wondering whether the weakening MYR will have some impact on deposit flight as in the rakyat (who may not understand economics as much) may think MYR weakness as a negative and start transferring money out of the country. This process is kinda self-fulfilling as in the more the MYR drop, the more money is being taken out of the system either by transfering it to a foreign bank account or on a smaller extend converting to foreign currency via money changer. Is that a big risk to domestic liquidity and the banking system? Granted, our LDR is still low relative to the region, just wondering whether this is something we should be worried about.

    Is there a theoretical limit to all the open market operations that an EM central bank can do to maintain domestic liquidity amidst capital outflow? If so, what will be the constraint?

    Plus, do you know the exact definition of the "Daily Fx Turnover" published by BNM? Is it the total onshore fx turnover? Here's the link :http://w2.bnm.gov.my/index.php?ch=statistic&pg=stats_dailyfxturnover

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    1. hoAugust 17, 2015 at 4:14 PM

      I am not sure how big a risk is to domestic liquidity, but Hisham's past post have put forward the view that the banking system has been relatively stable. Keep in mind that there has been a sustained capital flight since 2013 when US announced that it might start unraveling its monetary policy. So my opinion is that the banking system should still be stable in light of this.

      Theoretically, BNM is the lender of last resort for the Malaysian economy in that it is able to push its interest rate down to near zero to provide high amounts of liquidity should a need arise. But its monetary policy will ultimately be constrained by its inflation target and the decreasing effectiveness of monetary policy near the zero bound. ( Basically, US, EU and Japan has this problem ). If it is higher than the target, it should be increasing interest rates to bring inflation down.

      I think the main thing that we should be worried about is the volatility of the ringgit and not the perceived weakness of it that the public and media has been talking about. Exchange rate volatility has been shown to reduce trade volumes and activities. If a foreign company anticipates that the ringgit will depreciate, it might hold off on buying malaysian products as it will be cheaper tomorrow, vice versa. But this requires accurate forecasting of the exchange rate, and firms either domestic or foreign, may wait further until there is a stabilisation of the currency.

      This is just my 2 cent take on the matter.

      Delete
    2. hishamhAugust 22, 2015 at 10:48 AM

      @Rizal

      There's no risk to domestic liquidity, only to onshore FX liquidity. Bear in mind that in every transaction, there's a buyer and a seller; otherwise there's no transaction in the first place. Also, Ringgit conversion can only happen onshore.

      So for example, if someone were to convert Ringgit to a USD deposit at a local bank, there would be no change in either Ringgit liquidity or onshore USD liquidity (i.e. the M2 aggregate would not change). The bank now "owns" the Ringgit, while you "own" the USD - it's an exchange within the system, not a net loss.

      If on the other hand that USD was remitted to a foreign bank overseas, there would be no change in RM liquidity, but there would be a drop in local FX deposits (M2 would decrease). The Ringgit stays in the system, while the USD has left.

      The key problem for the banking system therefore wouldn't be their (Ringgit) LDR, but their (USD) LDR, or to be more precise, the balance on their external assets/liabilities.

      Note that a net FX liability position is not necessarily a problem if you have an underlying inflow of FX (a current account surplus). Korea for instance has been in this position for yoinks.

      For OMOs, there is no theoretical limit on the ability of central banks to support domestic liquidity, as they can create domestic currency on demand. However, the limit for onshore FX liquidity is constrained by the amount of international reserves a central bank has.

      As for the daily FX turnover, I don't know. But the Monthly Statistical Bulletin has a breakdown on a monthly basis.

      Delete
    3. hishamhAugust 22, 2015 at 10:52 AM

      @ho

      You've got a nice appreciation of the issues, except that BNM doesn't have an inflation target, explicit or implicit. Historically, BNM has always erred on the side of sustaining growth. Price stability has always been a part of their mandate, but they have been pretty flexible in their approach on this.

      Delete
  7. AnonymousAugust 19, 2015 at 6:27 PM

    Hisham

    Would you agree with this person's usage of your blog content. Or is it too much BN cybertrooper who is trying to paint a rosy picture
    https://forum.lowyat.net/index.php?showtopic=3683594&view=findpost&p=75950285

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    1. hishamhAugust 22, 2015 at 11:50 AM

      @anon 6.27

      Actually, as long as it is attributed correctly, I'm fine with people using my material. In this case also, he's arguing my points more or less correctly.

      Delete
  8. UnknownAugust 21, 2015 at 11:04 PM

    Dear Hisham, I know PM said they won't peg but he has lost so much of credibility due to his 1 mdb crisis. In your opinion will the govt peg the myr, why and if not why not? Btw today the usd/myr closed at 4.20.

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    1. hishamhAugust 22, 2015 at 11:54 AM

      @Jason

      My thoughts are here. Pegging while the Ringgit is depreciating is exactly the wrong thing to do.

      The PM told us that there has been no discussions on either pegging or capital controls.

      Delete

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