How low will the ringgit go?

By P. Gunasegaram

Its trials and tribulations time as Malaysia faces a titanic fall in the ringgit, the biggest and most alarming since 1997/98. And like those turbulent times, outrageous levels have been cited for the ringgit. Granted we have problems, still is all this talk warranted? Or is it orchestrated? Tiger awakes from his fitful slumber (does anyone have peaceful slumber these days) to prowl and probe.

“The degree of one’s emotions varies inversely with one’s knowledge of the facts.” – Bertrand Russell (1872-1970), British philosopher, mathematician, and historian.

Almost all talk these days at teas, lunches, dinners and any other occasion where people congregate centres around the ringgit and what will be the new low. In a scene reminiscent of 1998, there is widespread talk of the ringgit piercing through the RM5 per US dollar level and even of RM7.

But is that realistic, or is that a fable told to depress the ringgit as much possible so that those who have taken positions on a weaker ringgit can reap their massive gains? If so are there signs of orchestration of such a move, the way there were signs of a massive speculative attack on the ringgit as part of a wave against East Asian currencies in 1998?

Are there signs that reports and comments are ignoring key facts and reasoning, twisting arguments to give the impression that not just the ringgit but other currencies deserve to be much lower than they were before? Tiger will take a leap and a look and give its findings.

This time around, there two other factors widely attributed for the ringgit’s extreme weakness. They are that RM2.6 billion “donation” into the prime minister’s accounts and that maverick/rogue self-styled strategic development company that goes by the apocryphal name of 1Malaysia Development Bhd (1MDB) – if ever there was a company that tore apart Malaysians like never before, it was 1MDB.

Yes, without a doubt, there may well a new norm for Malaysia arising out of massive so-called political “donations” which border on the criminal and those blatant misdeeds of Minister of Finance Inc-owned 1MDB. And this new norm may even result in a higher risk premium and hence a lower price for all Malaysian assets, but has the ringgit gone too low or is there more in store?

That’s a pretty tough question to answer but the correct approach is to take a lot of the emotion out of the arguments, cool down a bit, no a lot, and then try to see how things are. In business parlance, do the fundamentals – which is a shifting target in a volatile market – justify this kind of rating for our ringgit?

What is causing the weakness in the ringgit, the worst-performing currency against the US dollar this year and the general weakness in many other currencies especially among Southeast Asian countries? Well, let’s enumerate the main reasons given for the ringgit weakness:

1. That political “donation” and 1MDB are causing a risk premium.
2. Malaysia is an oil and commodity producer and affected by a fall in prices of both.
3. Oil is a major source of revenue for the Malaysian government.
4. Foreign exchange reserves are likely to run out as foreigners take money out.
5. The bond market may collapse.
6. The US Fed will raise interest rates.
7. China’s economy is slowing.

The international media has widely reported along these lines repeatedly, highlighting the same reasons in different ways. The effect of this, whether intentional or not, is to induce a feeling of doom and gloom about the outlook for the ringgit and other currencies.

Such lack of confidence may well induce further panic in the currency markets causing more people to jump on the bandwagon and take positions against the currencies and especially the ringgit which seems to have been singled out in this particular instance just as the baht was in 1998.

Let’s look at some media reports. On Sept 24, Bloomberg reported in an article entitled “Do Malaysia, South Africa deserve junk? Moody’s model says yes” that six developing nations including Malaysia and South Africa deserve to follow Brazil into junk status, if credit default swaps traders are to be believed.

The headline almost implies that Moody’s is downgrading Malaysia to junk which is not the case as it has an “A3” investment grade rating for Malaysia. What the report was talking about was the gap in implied market ratings compared to Moody’s ratings.

In another report, on Sept 29, Bloomberg said: “Malaysia’s ringgit fell, headed for its biggest quarterly loss since 1997, as the relatively low level of import cover afforded by the nation’s foreign-exchange reserves makes the currency more vulnerable to an emerging markets selloff”.

But the fact of the matter is that reserves are sufficient to finance eight months of retained imports, hardly a vulnerable position, against three months of imports at the height of the Asian financial crisis of 1997/98.

And Reuters echoed on the same day that “foreign investors could pull up to another billion dollars out of embattled Malaysia’s bond markets this week, pushing the country a step closer to a currency reserves crisis that would send shudders across the region”.

How could that happen when the country has some US$95 billion (RM418.7 billion) in reserves? US$1 billion represents just about 1% of reserves, not anywhere near enough to cause a currency reserve crisis. Shudders around the region? Really?

Now let’s take a look at our list of reasons. Leaving out the first for last, the second reason is the persistent talk about how lower commodity and oil prices affect Malaysia more than other countries.

Fact is that commodities, including oil, account for only 18% of gross domestic product (GDP – sum of goods and services produced). The ringgit depreciation actually mitigates the impact of the fall in US dollar terms of oil, while commodity prices in Malaysian ringgit, notably palm oil, are already showing signs of increasing because of the ringgit depreciation. Our balance of trade position may even improve as the ringgit depreciates.

Yes, oil is a major source of revenue for the government accounting for about 30% but contrary to popular belief, the national oil corporation Petronas can still maintain its dividends to the government at the same amount as it has cash and near cash items exceeding RM100 billion. With all its expenditure cuts, Petronas can accommodate if the government requires it to.

Are foreign-exchange reserves likely to run out anytime soon? Let’s take a look at the graph of foreign-exchange reserves. And do take a look at the ringgit/US dollar chart too.

This is the significance of reserves: if funds flow in, Bank Negara Malaysia accumulates foreign-exchange reserves as investors demand ringgit and give up foreign currencies in return. The reserves increase is equivalent to the funds inflow. And when the funds flow out, the reserves fall accordingly.

Effectively the funds inflow and outflow mirrors the demand and supply for the ringgit. Reserve accumulation denotes inflows, increased ringgit demand and a strengthening ringgit, while reserve depletion implies outflows, demand for foreign currencies and a weakening ringgit.

In 1998, reserves were around US$20 billion and the ringgit pegged at RM3.80 to the US dollar. In 10 years, these reserves rose a massive six times to over US$140 billion in 2008 with the ringgit strengthening to RM3.00 per US dollar.

The onset of the world financial crisis in 2008 saw an outflow of funds back to the US and reserves plummeted a massive US$50 billion plus to level off around US$90 billion. The ringgit weakened to RM3.60.

With quantitative easing, funds flowed back in and the reserves rose almost as rapidly as it fell, reaching record levels of around US$155 billion in 2012. The ringgit was back up at RM3.00. The currencies of most emerging markets rose as well, but Malaysia was considered a more attractive market than most and the ringgit appreciated more as reserves went up more sharply.

Subsequently, as quantitative easing eased up the reserves began gradually to decrease with the pace accelerating in the last year on the back of falling oil prices, poor politics, governance concerns, as well as a slowing Chinese economy and an across-the-board fall in commodity prices.

But note that reserves still continue to be healthy at some US$95 billion and higher than the previous low of around RM90 billion circa 2008 but almost five times the US$20 billion in 1998. That’s not a currency reserve crisis especially since these reserves can support some eight months of retained imports against three months in 1998 – that’s a massive improvement. No, our reserves are not likely to run out any time soon.

But the difference is this time, the ringgit slide went past RM3.60 and now stands at around RM4.40, overshooting previous numbers since 1998, despite the fact that reserves are above 2009 levels. That indicates an over-correction caused by extreme negative sentiment on the ringgit.

Next on the list, will Malaysian bond prices collapse as foreigners exit? Bank Negara governor Zeti Akhtar Aziz was on record to say they won’t because there are local institutions who can pick these bonds up. But even if bond prices go lower, so what? So long as they can be redeemed when due, no problem. Meantime, it is time for our institutions to buy on the cheap.

And here’s something which is hardly ever mentioned, despite a reported 45% foreign ownership of bonds (it’s probably much less now with all that selldown), some 97% of Malaysian debt is denominated in the ringgit – no foreign-exchange risk. This is because much of the bonds are denominated in the ringgit too.

And that raising of US interest rates later this year must be one of the most discounted reasons of all – everyone is expecting it and much of the funds have already exited emerging markets in anticipation of this. When the rise comes, it will be a non-event. Ditto China’s slowing economy.

So, how low will the ringgit go? Sadly that’s tough to predict given market volatility, political uncertainty and 1MDB. Even if it goes lower, economic fundamentals indicate it won’t stay down for long unless there is a total collapse in confidence.

That’s where we Malaysians come in. Despite our political leadership, despite the grand larceny and corruption, despite the gloom and doom, we need to maintain our confidence and optimism as a nation and as an economy. We need to recognise and acknowledge the good even as we condemn the bad.

It’s not about being over-optimistic but being realistic and doing what we can to pressure the government into change when it comes to larger issues of corruption, money politics, patronage, lack of governance and such. We need to realise too that despite many bad things, our economy is not in shambles.

As long as Malaysians believe in the country and keep their funds here, no amount of foreign outflow is going to be a threat to our reserves. It’s a matter of time before foreign outflows ease up. In the meantime, our reserves are plenty to ride the rough spot out.

So when will the ringgit rise? That will happen when funds flow back into the system, when Malaysian assets are more attractive from an investment perspective and we continue to invest in our businesses and grow the economy and our incomes despite government shortcomings.

We are after all in this proverbial boat together, and we sink or swim together.

GRRRRR!!!