Monday, September 9, 2013

Ringgit Getting You Down? Don’t Panic

The stock market is losing ground, the Ringgit is being hammered, interest rates are slowly rising, inflation is increasing, and growth is anaemic. Not a whole lot of good news lately.

Don’t Panic.

The market selldown is general; it’s happening across the region and pretty much affecting most emerging markets. Malaysia is one of many, and we’re not being singled out. Just as expansionary monetary policy in advanced economies and greater global liquidity helped support emerging markets in 2010-2011, we’re seeing a pullback as the Fed begins signalling its willingness to reverse course.

Don’t Panic.

What’s going on is not a referendum on Malaysia, and is not a reflection of our economic policies or on the state of our economy. Just as Malaysia and the Ringgit benefited greatly from global capital flows (the Ringgit rose 13.5% against the USD between 2008-2010), nobody should be too surprised if it drops back when global capital flows reverse.

Don’t Panic.

This has nothing to do with governance, with Pemandu and the ETP, the fiscal situation or the quality of the PM’s advisers. This is life as a small open economy with almost no capital controls, in a world of globalised monetary and financial linkages. If anything, I would say that the ETP was virtually the only thing keeping growth going the past couple of years. If not for the kick in the pants from higher public and private investment, we’d be in the same shoes as Singapore, Hong Kong, Korea and Taiwan, wondering if we’d see any growth at all. Out of that lot, only Korea managed growth higher than 2.0% last year, and that only by a hair.

Don’t Panic.

This will not turn into a repeat of 1997-98. I remember those days when street hawkers were punting the stock market, buildings were mushrooming everywhere, when real estate was more frothy than a Carlsberg draft, and bankers had been drunkenly partying for three straight years. If anybody thinks we have a property bubble now, then they’ve never seen a real one before.

Don’t Panic.

In 1997, Malaysia had been running a current account deficit for 8 straight years, and 15 out of the previous two decades. Now people are wringing their hands because the current account might (might!) turn negative for the first time since 1998. Before 1997, we had international reserves amounting to about RM70 billion or 27% of GDP but a banking sector whose external balance was in the red by RM22 billion. Now, our international reserves are nearly RM440 billion or 45% of GDP and the banking system started the year with an over RM60 billion external surplus.

Don’t Panic.

Back then, the Ringgit was seriously overvalued with a rigid peg to the USD and a financial system that was immature and not well-capitalised. To speculators that had feasted on the Peso and the Pound, it was like going around carrying a sign saying, “Kick Me!”  We’re in a much better position now than we have ever been, with a capital market and financial system that is both deep and broad, a fully flexible exchange rate regime, and a central bank that fully understands the lessons of the 1997-98 crisis and what to do in future crises.

Don’t Panic.

We need look no further than what happened in late 2008. While I might quibble about the speed and depth of monetary loosening, I’ve no complaints about BNM’s liquidity support, or approach towards the Ringgit. Post-crisis, our monetary system is as resilient as ever.

Why Panic?


  1. Thank you thank you....

    But what brought this write-up .... anywhere good to remind ourselves where we are now compared to 1997, 1998, some really dark time then.

    Zuo De

  2. There are 2 ways to view something, in relative terms and in absolute terms. Relative comparison can be made good or bad depends on what you compare to.

    I can tell a cancer patient, why panic? Everyone is getting cancer nowadays. I am anchoring to the point that everyone got it so it must be normal and we are doing well.

    If I am a smoker, I can tell myself, in 1997, I smoke 2 packs of cigarettes a day. Now I smoke only 1 pack, so I am better because I do less of the wrong thing.

    Or maybe in 1997 I lost 5 fingers in an accident, today I lost only 2, it is so much better. In absolute terms we have lost 6 fingers. What is RM worth today in terms of purchasing power since 1997 crisis?

    We can say our 3% interest is good because US and Japanese savers are getting 0%. But we can also compare to the old times where we can easily get above 5%. And in absolute terms, how do retiree live with 3% interest? They have been told by their financial advisers to expect 6% when they save for the last 40 years. And even if money printing works, at what price and who is paying for it?

    In absolute terms, we are not good. We don't need to be panic, but we need to prepare. :D

    p/s Money printing (expansionary liquidity and global liquidity) does not solve a problem but delay it and make it more serious in the future. It doesn't begin with sub prime, just look back. But they (the Keynesian) don't see it because they will tell you we got crisis again because we didn't do enough last time, we should have printed even more! That's what Krugman said again few days ago.

    It is like someone get divorced and you tell him, "Hey your wife left you because you beat her all the time." And he told you. "No, my wife left me because I didn't beat her enough! She won't dare to leave me if I had beat her more."

    We live in a crazy world.

    p/s 2. Don't take this comment personal. Internet commenters are as crazy as Krugman because we live behind a computer screen. :D

    1. Admin please correct 6 fingers to 7 fingers. LOL.

    2. @anon 11.09

      Actually, I wrote this post from an absolute perspective, not a relative one.

      In 1997, we were drunken party-goers, and had a massive hangover as a result. In 2013 by contrast, we're sober moralists and we're being annoyed by the noisy neighbour's party next door.

      Back then, we made policy mistakes galore - revaluing the Ringgit to 2.50 per USD in 1992-93; zero response to the Yuan devaluation in 1994; cessation of forex sterilisation in 1995; no policy response to banks growing their loan books by 30%pa in 1995-97; very late response to the commercial and residential property and stock market bubbles; and many more.

      This time, the policy tools and settings look about right. Neither the Ringgit nor the stock market was seriously overvalued prior to the capital outflows.

      In fact, neither has actually moved much - on a trade weighted basis, the Ringgit is down just 1% from last year, and just 3% from last year. Market cap to GNI is at 1.5, right around Malaysia's long term average - in 1996, it was double that.

      Housing is the only major asset area that could be said to be in a bubble, but property statistics show it coming to a screeching halt this year. Average house prices are down in all but four states. Property transactions are down 6.7%.

      There's just no comparison between now and then, and I fail to see how anybody can claim that the two situations are remotely the same.

      If anybody could be said to be in the same situation as we were in 1997, it would be India. I've been bearish on India since 2007-2008, because the data clearly showed imbalances and trouble ahead. I don't see the same things in Malaysia.

    3. Sorry, for the Ringgit movement it should be 1% y-o-y, and 3% from December 2012.

  3. With all due respect Anon 11.09 am.

    If keynesian economic actions in the face of recession is a wrong move. what is the right one?. Does belt tightening and austerity package sounds right. It should if and only if government spending cut is countered by private sector spending. That wasn't the case for some country. Eurozone tried to do so in the face of SDC in a calculated manner if I may say so. They in fact had a monitoring group. The package works for certain countries such as Germany and Austria but it doesn't work for all.

    What happen than. There is a certain isolated cases where Austerity in facts further deteriorate the country economics such as Greece and Portugal where they done a dramatic reversal with a mega project. Building a highways in Greece.

    In some countries, where the dependencies is higher on government than private sector, I say belt tightening is not the right move. However, I do agree that uncontrolled blatant spendings should not go uncheck. There should be a watchdog groups for such countries.

    P/S: I think hisham had posted before a paper on the independencies of Malaysia on government spending. I guess by right a fiscal tightening in Malaysia should not have much impact on economies. Was I right or wrong ?

    1. The Austrian School

      What Keynesian (modern economics) does is the same as what modern medicine does. It focus on symptom (effects) and not the causes. Recession is a symptom, an effect. It is natural and normal. It is painful in the short term but it makes the future better.

      To understand this we need a huge perspective change. We are too used to the thinking that recession is bad just like fever is bad. Then we do a lot to make sure the fever goes away. We take medicines. But the problem is not the fever. The fever is actually the solution. Your body is reacting to the real problem (imbalance) and the solution is the fever. The economy is reacting to the real problem (imbalance) and the solution is a recession.

      But we are like a drug addicts now, instead of small recession, we snowball it into bigger and bigger recessions and now we are at the cliff - life and death. Stop taking the shots, we die [see how sensitive is our market to Ben Bernanke money printing]. Continue to take it? Then we can expect a sudden death, just that we don't know when.

      A mild Keynesian move may seems to work, because it punish the savers and middle class by transfering their wealth away through inflation (indirect tax, tax means government takes your money) and spend them on bail-outs and other unproductive investments (building more PutraJayas).

      A strong Keynesian move right now is devastating. Money don't just simply flow to consumer and they don't end up spending more and boost the economy. Instad of using the money to consume, they invest. Someone who save RM100k in FD don't think, "Oh, interest is peanuts now, why not buy a new car or a new Hi-Fi?". What they will do is speculate on something to get better yields. The stock market is push up higher for this reason. So as the property market. But busines earnings doesn't go up like the stock market and the property market (unless you are in fund managing business or a property developer).

      I came from Ipoh and if you look around, we have vacant shops everywhere. These are new shops and they are always vacant with "For Rent" on the shutter. But they are all sold out. And the joke is that there are more and more and more shops being build even just beside these vacant shops. And they sold out again. Why? Because money flow to investment products and not consumer products. Retail sales just don't improve (same in Malaysia, in US and in China). Just look at WalMart and McDonalds last reporting. If businesses are not doing that well, they don't expand and rent shop. That's why there are so many vacant shops. The investor has been mislead to speculate on buying the shops in hope for better yields than bank deposits and now they get no yield at all. But people keep on buying because they think the empty shops will worth more (on paper at least) and everyone has a tendency to believe bad things don't happen to them because they are luckier. So they believe their shop can be rented out. For those who invested in the stock market, are businesses going to report stronger and stronger profit to justify the artificial high stock price?

      p/s I am not here to upset anyone. I believe the author of this blog is here to share and expand his perspectives through comments and this is what I am doing, sharing my perspective. I am not trying to win.

    2. @anon 1.11

      No worries. I welcome dissenting views, that's what I consider a blog to be for - a conversation between friends, or at least friendly enemies!

      Bank credit growth 1994-1997 exceeded 20% y-o-y (in some months, it was over 30%). For 2009-2012, it peaked at just over 12%.

      Austrian theory is a view of the business cycle based on ebbs and flows of credit, driven by misalignment of market interest rates against a putative "natural" rate of interest.

      The Austrians would have been correct in 1994-96; but that's hardly the case now. They also have a fundamentally flawed and obsolete view of how the modern monetary system actually works.

      Re: housing and commercial property. As I said in my other comments, property does indeed look bubbly, but appears to be now entering a down-cycle (transactions are down, commercial occupancy rates are also down). But since the runup was not driven by excessive credit growth, the down cycle will not be as damaging either (smaller feedback effects into the banking system and back into the economy).

      Also, we cannot discount demographic changes and internal migration as factors in house price increases.

      Re: Stock prices. They're not overvalued, certainly not to the extent they were in 1994-96.

      BTW, retail trade in Malaysia was up 8% in 2Q2013, and some segments are recording double digit increases. Data from US surveys show consumer and business confidence is rising rapidly, and imports are up as well. US house prices began recovering in the middle of last year IIRC. Europe is on the mend as well, leaving recession for the first time in six quarters. Global growth is likely to be stronger this year, which has pulled funds back to advanced economies. All we're seeing is a portfolio adjustment, not a fundamental rethink of emerging market risk.

  4. Have been in housing market since 1996. This round the price increase and buying spree are much bigger than mid 90. Maybe the buying spree maybe arguable, as mid 90s also very crazy. But definitely not the price increase (%), not even close.

    1. @anon 12.21

      The data says prices in 1995-96 were going up twice as fast as in the last couple of years on an overall basis. By housing type, it's partly terrace houses (a little below the 1995-96 pace) and high rises (waaaay above). But high rises have been a poor market before this, so it could be just a catch-up process.

      So it really depends on which segment you're looking at, and where. But overall what I said is supported by the available data.

  5. Hisham,

    1997-98 versus current.

    The facts presented is corrected but it is not an apple to apple comparisons to be fair. If you could elaborate the following (as during 90s):

    1. Lower household debts, well below 50% of GDP.

    2. Higher interests rate, averaged above 8%.

    3. Private consumption has lesser weighting to overall economy.

    4. Savings rate was higher than current.

    5. Less developed bond market compare to now. Although borrowing has lesser exposure to other currency, but due to the increase foreigner holding, Malaysia is hardly, insulated from global volatility, i.e sudden sell-of triggers spike of interests rate versus RM depreciation (as in 97) has 'similar' consequence: increase the cost of borrowing.

    1. @anon 12.36

      1. You need to account for all balance sheets, not just one sector. In the 1990s households had lower debt and government was also a net saver. Yet we had a current account deficit i.e. the country as a whole was a net borrower. The inescapable conclusion - the corporate sector was in hock to its neck. And so it proved.

      2. You should be looking at real interest rates, not nominal. Inflation in 1994-1997 averaged nearly 2% higher than it is now.

      3. Higher private investment implies greater volatility of GDP growth. Investment of course includes building of structures and development of properties, whether anyone actually uses it or not.

      4. The savings rate is misleading, as it doesn't tell you who's doing the saving or dis-saving (related to point 1. above).

      5. Actually the better developed bond market of today is a plus factor. Yes it allows another avenue for foreigners to enter or leave Malaysian markets. On the other hand, it's large enough that it can absorb such flows much more easily.

      All that money leaving our shores and whacking the Ringgit, how much have bond yields moved?

      For 10 year MGS, about 65bp or 0.65% from April up to June, but it's come back to 3.90% currently, or just about 0.5%. Lower maturities have moved far less. Interbank rates (even over 3 mths), have barely moved at all. Neither have BNM Bills, despite half of them being owned by foreigners.

      In addition, the spike in interest rates in 1997 was not due to the foreign sell-off, but a policy induced consequence of the decision to "defend" the currency (i.e. the IMF "solution") that was followed before sanity prevailed - overnight rates climbed to 18% as I recall. But that implies a monetary contraction, right when it would be most damaging. As I said, many, many policy mistakes were made back then. You can see the parallels in what India and Indonesia are attempting to do now.

  6. Bro Hisham,

    Great articles. Regarding the ringgit, I have friends working as dealers that told me that the speculators cannot speculate the ringgit anymore as we use the manage float system instead of free float system as in 1997 case. If foreigners want to buy ringgit with big amount they must state the reason for it, either its for investment or trades. And in terms of the sharp rally of ringgit, he mentioned that its not necessary due to the massive sell off by foreigners, it could be also due the local dealers that push the usd/myr higher to deter foreigners from selling their assets here and to attract new investors to buy. Sometimes the market open with a gap up from yesterday closing despite no real trade done yet and central bank seems okay to see ringgit weaken. Not sure if this is true ?

    As usual, heh I've few questions to ask you, since u said monitory tightening is not the answer for this problem, that would imply that central bank should continue injecting liquidity in the banking system. So where should this surplus of money goes to, should bank increase their loan book at this point of time? And u mentioned about bank external balances, what this balances consist of ?


    1. @anon 9.29

      Thank you.

      1. On the Ringgit, you have it backwards. We were on a managed float from the mid-1980s to July 1997, and the current regime is classified by the IMF as "other" :)

      2. BNM's current policy is non-intervention with the exchange rate unless the market is unusually volatile or banking system is short of foreign exchange i.e. the external balance you were asking about.

      3. The stance of monetary policy does not imply any particular direction to the flow of liquidity, as these depend on the circumstances at the time. You might want to refer to this for an overview.

  7. the black hole caused by derivative fraud back in 2008 is at conservative figure in 3 years past as USD 1.5 quadrillion and US are pulling their factories overseas, shipping back jobs to onshore. this black hole could be used as a secret weapon to any countries flood their money to perpetrate a grind-to-a-halt format of recession. do we take into account that US can never recover from that artificial implosion?