Monday, October 23, 2023

The geopolitics of the weakening ringgit

Ringgit level is 4.78 today, the highest level for the past 22 years. The climbing dollar and weakening ringgit have been the conversation in both the financial market and political circle for the past two weeks.  

The opposition narrative will be to use a shallow political argument to blame the Unity Government Prime Minister, Anwar Ibrahim as incompetence or surprising to come from PN, accusation of corruption. 

The counter argument is the legacy left by the previous administrations of Mahathir, Muhyiddin and Ismail Sabri which saw debt surpassing RM1.0 trillion from the RM688 billion left by Najib.    

Be it inherited or self imposed, there is no denying there are economic issues faced by the Unity Government. And, it is not only Ringgit that is weakening against the US. However, the Ringgit not only weakened against dollar but also against other currencies such as Singapore dollar, Thai Baht, and Japanese Yen. 

The hunch is the bigger impact on Ringgit is geo-global politics in nature. There could be a retaliation  against Malaysia for its strong position on Palestine. 

Difficult position

Though Anwar is careful to not commit support for Hamas, reiterate the commitment for Palestine is for humanitarian support and call for peace, he acknowledge knowing Hamas. Apparently the American do not take kindly to it. 

Hamas has affiliation with Ikhanul Muslimin, which in turn has links with Anwar's ABIM and PAS. PAS was instrumental in pressuring Malaysia to send its military to Gaza. 

In fact, a Hamas activist in Malaysia expected a stronger position from Anwar in an interview on Khairy Jamaluddin's radio talk show. It could be reaction to the politically and militarily infeasible demand for Malaysian millitary participation rejected by Anwar.   

This time around the Israeli narrative to label Hamas as terrorist gained international support and silenced the majority of Muslim countries. It gave the Israeli the excuse to evacuate Palestinians from Gaza. 

Hamas first strike using their "home-made" rockets surprisingly managed to penetrate Israel's impenetrable iron dome. Lost in the international media propaganda is the fact that Hamas was a creation of the Israeli and it was acknowledged by the Americans

The dilemma and international pressure faced by Anwar could be felt during the weekend rally for Palestine organised by Viva Palestina and pro-Pakatan Harapan NGOs. 

Host, Dr Musa Nordin harshly called those displaying devilish depiction of Netanyahu as Malay Zionist. There were claims takbir calling of Allahu Akbar and any mention of the term Zionist disallowed

Situation must be delicate to warrant such precaution.

The American and NATO seemed to conveniently used Gaza as the launch pad on Iran, to gain absolute control of the Middle East and send a message to Russia and China. 

Ukraine lost control of the Eastern region and Crimea to Russia. The US and NATO backed regime lost the war but it is intentionally prolonged. Geopolitical analysts went as far as prediction a new milleneum version of World War III. 

Though Asia is a distance away from the theater of operation, the hawkish American have been persuading Taiwan for a war against China. Any tension on the South China Sea will put neutral Malaysia in a difficult situation. 

China is its major trading partner but it has a 9-dash line claim on the territory of Malaysia in the South China Sea. It will put Malaysia in a bind between the two superpowers. It need help from the West to protect its sea border, but the US pressure on Palestinian issue puts Malaysia in a dicey position.

Anwar knows the risk of being vocal for the Palestinian. And ringgit becomes the easy target for attack.      

Unlike US dollar, Ringgit is not backed by air craft carriers to be a  safe haven currency whenever political crisis arise. Declining export, significantly due to structural issue facing the Chinese economy, made Ringgit inelastic or not responsive to any correctional movement.    

Interest rate differential between the USD and Ringgit is the major underlying factor in determining the Ringgit's trend vis-a-vis the dollar whether it is bullish or bearish. 

Howver, the successive Malaysian administrations are reluctant to raise interest rate and close the gap with US interest rates for fear it will worsen the already struggling local economy. 

Federal Reserve held back from hiking interest rate last week, but the fear is not over.  The concern on the inflation situation in the US remain. Market expect a 25 basis point hike by December and at least two 25 basis points hikes for 2024. 

Ringgit is at a 22 month low. Though not at the all time high of 4.88 during the currency crisis of 1998-2000, interest rate for the US  coincidentally is at 22 year high. 

The prejudicial presumptions made on Najib and opinionated views on Palestinian, extremism and Malay voters are not agreeable, but the latest from Finance Twitter below touched base with similar geoglobal reason for the decline of Ringgit vis-a-vis the dollar: 

Kaboom! Ringgit At 25-Year Low – Here’s Why The Currency Could Plunge To RM5 To The U.S. Dollar

October 21st, 2023 by financetwitter

MIDF Research said in March that the Ringgit will reach RM4.00 against the U.S. dollar by end 2023. However, the Malaysian currency continued to drop, hitting RM4.66 in July. Bank Negara Malaysia (Central Bank), meanwhile, insisted that the weakness in the local currency “does not reflect economic fundamentals”. Conveniently, it blamed external factors, which was beyond its control.

In September, Hong Leong Investment Bank Research said that it expected the Ringgit to hit RM4.60 to the greenback by the year-end. But even as recently as early this month, the defiant analysts at MIDF Research said they were still confident that the currency will end the year at RM4.30. Like Bank Negara, MIDF declared that the worst was over. Of course, they were all wrong.

The Malaysian Ringgit fell to as low as RM4.782 per dollar yesterday – the weakest since the 1997 Asian Financial Crisis. In fact, it is the worst currency in Asia after the Japanese Yen. During the crisis 25 years ago, the Ringgit had fallen to RM4.88 in January 1998. But if you think it would not cross RM4.88 again – or even RM5.00 – then you should think again.

Still, how could the central bank or the genius at the research houses get so wrong in their predictions? Simple – either they had no idea what they were talking about (like those at MIDF), or they were desperately trying to convince investors that Ringgit had stabilized (like the central bank) in order to stop the bleeding. Obviously, the US$7.5 trillion daily-foreign-exchange-market did not buy the story.

The reason Ringgit is weak, and will stay that way for the rest of the year is simple – because the dollar is strong. The greenback is strong due to the 22-year high U.S. interest rate, which is needed to fight high inflation, which in turn was triggered by high energy prices, which exploded after the Russian invasion of Ukraine War, which in turn was due to the expansion of NATO to Russia’s doorstep.

Therefore, as long as the ongoing war continues in Ukraine, which looks like the case as both Vladimir Putin and Joe Biden could not lose face, the Ringgit will remain weak against the dollar. In addition to the dollar being the world’s “reserve currency”, hence the safest asset to hold when stock and bond markets turn volatile, the proxy war between the U.S. and Russia means greater demands for the currency.

The U.S. currency interest rate is 5.5%, whilst Malaysia halts its interest-rate hikes at 3% since July. The difference of 2.5% is a lot of money. An investor with US$100 million will earn a return of US$5.5 million if the money is kept in the American saving account as compared to just US$3 million in Malaysia. This makes it less attractive for dollar-based investors to buy Ringgit-denominated assets.

The Ringgit also depreciated against other major currencies except the British pound. It tumbled against the Euro, Yen as well as neighbouring Singapore dollar, where it is testing the RM3.50 level. This suggests that the local currency’s weakness against the U.S. dollar isn’t about U.S. Federal Reserve alone, but also due to low demand for Ringgit in the international market.

Thanks to decades of corruption and plundering – either to fund wasteful mega projects during the Mahathir administration or to enrich crooked leaders like former premier Najib Razak in the 1MDB scandal – the central bank has very few options in its toolbox to defend the Ringgit. Unlike Singapore and Hong Kong, Malaysia has limited reserves to intervene in the foreign exchange market.

Saddled with RM1.5 trillion national debt, it isn’t earning revenue fast enough to serve its ballooning debts. As revealed in its Budget 2024, the largest in Malaysia’s history, a mind-boggling RM303.8 billion has been allocated for operating expenditure (opex), leaving only RM90 billion for development expenditure. The government has to borrow RM86.2 billion, or 21.9% of the RM393.8 billion budget.

To pay the salaries of the 1.71-million bloated civil servants alone, RM95.6 billion (24.3% of total budget) has been allocated. Retirement for government pensioners would burn another RM32.4 billion (8.2% of Budget 2024). Worse, in order to appease the government staffs, 90% of whom are Malay voters, Prime Minister Anwar Ibrahim has agreed to increase their salary.

Even if Anwar-led unity government can stop the cancerous leakages, which it can’t, the past racist and discrimination policy of mass recruitment of a certain ethnicity into the government employment – without consideration for meritocracy, competency or productivity – has come back to haunt the government. The cost of maintaining this vote bank will kill the budget and the currency.

Nobody – not even PM Anwar – dares to bell the cat as it is political suicide to even suggest a downsizing of the world’s most bloated civil service. Every single prime minister chose to kick the can down the road, and let our grandkids solve that problem. However, investors were not dumb and they could see the problems with a country with such a disaster annual budget.

While the country is not bankrupt, at least not yet, the real amount of money it possesses in terms of purchasing power is depleting fast. The pause on the overnight policy rate (OPR) hikes was a mistake as it intensifies capital outflow to take advantage of higher returns in the United States. But the policymakers have no choice because to raise interest rates further could kill local businesses.

While the prime minister talks about “de-dollarization”, the Ringgit would hit RM5 before such measure could see any meaningful results. Those who argued that a weak currency is good for exporters have forgotten that it equally impacts imports – hence the cost of living will skyrocket. To add salt to the wound, exporters and corporations are holding foreign reserves in dollar, refusing to convert it back to Ringgit.

Even though the Federal Reserve hits pause on interest rate hikes while it reviews more data, Chairman Jerome Powell said on Thursday (Oct-19) that the inflation is still too high. Determined to bring inflation down to 2%, the Fed might raise the rate again. Even if the benchmark rate is left undisturbed at its current highest level in 22 years, the Ringgit will remain weak.

The latest Israel-Hamas war didn’t help the local currency as the conflict in the Middle East has spooked investors to load up more dollars, strengthening the American currency even more. To make matters worse, Anwar blindly and recklessly expressed his support for terrorist Hamas just because they share the same religion. He had no idea the influence of the Jews in finance, economics and business.

Janet Yellen, Elon Musk, Mark Zuckerberg, Sergey Brin, Larry Page, Goldman Sachs, Intel, Michael Bloomberg, Estée Lauder, WeWork, McDonald’s, Walt Disney and Pfizer are all Jewish, Jewish-owned brands or pro-Semitic powerful people, just to name a few. And do we need to remind Anwar how George Soros attacked and brought down Malaysian currency during the 1997/98 Asian Financial Crisis?

Perhaps Malaysia thought it could offend Washington because it has Beijing. Unfortunately, the Southeast Asian country posted seven straight months of decline in exports through September due to a slowdown in China, its largest trading partner. According to the Malaysia External Trade Statistic Bulletin (September 2023), total trade contracted by 12.6% year-on-year to RM224.4 billion.

Essentially, exports fell 13.7% to RM124.5 billion, while imports dropped 11.1% to RM100.0 billion. In September 2023 alone, trade surplus saw a reduction of 23.0%, amounting to RM24.5 billion. Clearly, this contributes to Ringgit underperformance. In fact, the decrease in the trade surplus was not only with China, but also with Singapore, Japan, Indonesia, Australia and the U.S.

More critically, instead of demonstrating leadership, competency and policies that could instil investors’ confidence in Malaysian economy and currency, the prime minister spends too much time in extreme religious politics. There’s a reason why foreign investors avoid countries, especially Muslim-majority nations that subscribe to radicalization and extremism.

It was also a strategic error for Anwar Ibrahim to invite PAS Islamist party to join the unity government. Perhaps he was trying to troll the religious extremists. Perhaps he was trying to hedge his political move. But it creates an impression of political instability, which will spook investments. It was both dumb and dangerous that Anwar acknowledges his ties with Hamas.

Silly Anwar is the only state leader, besides the regime in Tehran, to publicly declare Hamas terrorists were his brother. After Washington showed its displeasure over his support for the terror group, the European Union might reconsider its economic relations with Malaysia. Yes, Anwar’s stance is problematic due to previous reports that uncovered a training program in Malaysia from 2012 that trained Hamas fighters how to fly powered parachutes.

If the U.S. and E.U. decide to slap economic sanctions (or restrictions) on Malaysia, the Ringgit would be lucky if it could remain at RM5 to the dollar, and not plunge to RM6 and beyond. Unable to differentiate between Hamas and Palestinians, Malaysia is asking for trouble by trying to justify Hamas’ terrorism, which has killed more than 1,300 civilians.

Ringgit is internationally traded, thus any analysis cannot be confined to local political perspevtive and Malaysian economic development. It is more relevent now that the geoglobal political tension is on escalation mode.

1 comment:

Anonymous said...

Ringgit continously sliding down against USD, even before the conflicts or pandemic i.e. since PH 1.0 came into power... What is PMX is doing about it now? He is the one using the same narrative to attack TSMY and DSIS administration when he is in the opposition... now he is the PM, where is the solution? I don't see any... he is even afraid to announce any fiscal reform during Bajet 2024..