To peg or not to peg, and why some of us should stop bitching about the ringgit

Meanwhile, the greenback has been rising in anticipation of a US interest rate hike ... [in other words, not because of Najib Razak] - Australian dollar falls, The Guardina, 11/8

12/8/2015: The other night, a learned YB from an Opposition party told a group of us that Najib Razak should be pegging the ringgit already. "Dr Mahathir would have done it by now," said the YB. I stifled a chuckle. Until Dr M started making demands for Najib to step down as Prime Minister, the YB had no love whatsoever for the Old Man. I'll bet my bottom ringgit (sorry, I don't have any dollar) that once the Prime Minister has quit, Mr YB will go back to his Mahathir-bashing days.

Dr M announced the "unthinkable" move of pegging the ringgit at 3.80 to the dollar on 1 Sept 1998, the same day he sacked Anwar Ibrahim as his deputy. By then, our currency had fallen to 4.8 to the dollar. Yesterday the ringgit hit 3.96 against the US dollar [The Star, 11/8], lowest since the peg but long way to go to 4.80.

Thumbs-up to fundamentals

And that's not the only reason why pegging isn't necessary right now,  ex-banker Abdul Wahid Omar (pic), now Minister in the Prime Minister's Department, says in this Whatsapp message. The circumstances are very different back in 1998 compared with now. The fundamentals have changed. In a nutshell, AWO sums it up:

- Back in 1997/98, Malaysia had international reserves below USD30b sufficient to cover only 3.2mths of retained imports. 

- We had trade deficit (1994-1997); corporates were highly geared with many borrowing in USD when their income/assets were in MYR. 

- Now even after the recent outflows, our international reserves is more than 3 times larger at USD96.7b as at 31 July 2015 sufficient to cover 7.6 mths of retained imports. 

- Our trade surplus reached RM41b for 1st half 2015 notwithstanding the lower oil; commodity prices.

- Corporates' balance sheets are much healthier with minimal USD borrowings for those without matching USD asssets / revenue stream. 

- Our labour market conditions are stable with low unemployment rate of 3%. 

- Our banks are well capitalised with core Tier1 capital ratios of 12.5%, liquid; with good asset quality where net impaired loans ratio is at a low of 1.2%. 

- Banks, financial system are well regulated; supervised by BNM. 

- Our fiscal position continues to improve with budget deficit reducing from 3.4% of GDP in 2014 to a target of 3.2% in 2015. 

- We are still on track to achieve GDP growth of between 4.5% and 5.5% this year.

 

Rogue currency traders were the culprits in 1998 but what we are seeing now is the strengthening of the dollar against the world, not just the ringgit, we were told last night over sushi and sukiyaki by a former international bond trader whose clients were so filthy rich that USD700 million is what they might spend on stuff like converting their private airliners into their flying palaces. (Talk about Japanese, the ringgit has strengthened against the yen by a whopping 14 per cent! Read Malaysians are now currency experts? Goh Wei Lang, 11/8)

Once the US increases interest rates next month, the ringgit, along with other currencies, should stabilize, Mr Bond Trader says. He went on the explain how currency trading works and why bonds drive currency rates up or down. Do read up about US zero interest rate policy in Gross: Fed slowly recognising ZIRP has downside consequences, July 30; also Wiki on ZIRP].

Complicated, right? But some Malaysians, even though they can't manage their own finances properly, are experts in everything, from DNA to currency and back. As Mr Goh Wei Lang observes:

"... in just the past month, I saw how Malaysians transform from being constitutional experts, to aviation analysts and now economics.

Some even went as far as pushing the blame on UMNO and Najib. There's this group called Suara Rakyat who likes to say "other countries are doing better because UMNO is not there in their country".

Of course, when you have a narrow, myopic view, you will tend to miss out the fact that over the 5 year period,

•    Russian Roubles lost 114% against USD

•    Indonesian Rupiah lost 51% against USD

•    Indian Rupees lost 38% against USD

•    Norwegian Krone lost 37% against USD

•    Australian Dollars lost 24% against USD

•    Euro lost 20% against USD

•    Thai Baht lost 10% against USD"

I can understand where Mr YB from the Opposition is coming from: the Opposition wants Najib kicked out because that will create the perfect crisis that could very well spell BN's end in the next general election. At the same time, he also wants Najib to peg the ringgit because he's personally affected by the lower value of our currency against the dollar. But the rest of us who don't have children studying in America, don't travel regularly to the US, don't import goods from the US to re-sell here, and don't plan to buy a Harley any time soon ... should stop bitching. 

p.s. Mr Goh's A Piece of My Mind is back on my Other Blogs That Rock! I think he should be blogging more regularly.