By Stephanie Jacob
CIMB Chairman Nazir Razak said that it is important to properly diagnose the economic headwinds which are causing the weak ringgit so proper actions can be taken to strengthen the local unit.
Nazir Razak
Nazir said that in his view the weakening ringgit was being caused by a mix of issues. “(The economy) is being challenged by what is happening in China, with the slowing economy and the devaluation of its currency. And obviously there is the challenge of higher US interest rates and the significant drop in commodity prices.
“And if you look at it, many many countries are being challenged by these factors and there are several countries which are facing even sterner challenges than Malaysia, given the complexion of their economies. There are some economies even more dependent on oil, for an instance,” said Nazir.
Nonetheless, Nazir said that the rate at which the ringgit has fallen as well as the widening of the credit default swap (CDS) spreads for Malaysian credit was concerning.
“I am a little concerned that if you look at those data points, the ringgit and the CDS spreads, they are way beyond fundamental values. CIMB’s analyst thinks on a trade weighted basis, the ringgit should be about at RM3.70 (to the US dollar).”
Therefore it is crucial in any economic situation for the issues to be properly diagnosed. “We must get it diagnosed properly, so that we can handle it with the right set of policy measures,” he added.
Nazir commended Prime Minister and Finance Minister Najib Razak’s recent announcement that he would engage a cross section of economic and financial experts to get their perspective of the situation.
He said this is important so he hears a lot of different and diverse views which will allow him to make an informed assessment of what needs to be done.
Nazir emphasised that it was important to stop suggesting that those who are speaking on the matter or raising concerns over the economic situation of the country are engaging in economic sabotage.
“It is important to keep the right perspective of things. It is very dangerous when people are too flippant regarding what is going on. I think this suggestion that there is some kind of economic sabotage (by those raising concerns) is not a very useful way of analysing the situation.
“I think that will turn people off…it will create a climate of fear and people will be apprehensive about speaking out. But (then) at the same time we want people to tell or speak up to the PM to let him know what is going on the ground, so that the PM can respond correctly. So if there are people saying there is economic sabotage, people will get scared about telling the truth. And if people are not telling the truth, we might get the wrong prescription, said Nazir.
The chairman agreed that it was reasonable to assume that political uncertainty is having some effect on international investors.
“Many of these investors are far away (from Malaysia) and when they hear about some of the issues going on in the political scene, they take the view that, why should we get involved and will go to another country. So you have this exodus which can cause an outflow of capital and this can cause the ringgit to overshoot and lower in value,” he said.
Nonetheless even just based on fundamentals there is justification for the ringgit to decline similar to other currencies versus the US dollar, he said.
Nazir said he concurred with Bank Negara Govenor Zeti Aziz’s view that capital controls or pegging the ringgit were not options to fix the current economic issues.
“If you look at the data today versus 1997 or 1998, we are certainly nowhere near those extremes in terms of movements of prices etc. And I think the present situation must be properly diagnosed and measures must be taken that are correct for the situation. Do not go and use the wrong medication. That would be very dangerous.”
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