Where Does Money Supply, Interest Rates and Inflation Intersect?

Money supply is influenced by supply and demand actions of the central bank and commercial banks. In this context, it is interesting to examine narrow (M1) measure of money supply (currency in circulation and demand deposits) with M3, the broader measure of money supply and its impact on GDP, inflation and the changes in OPR (overnight policy rate).

The above chart (with data from 2012 to 2021) shows growth of M1, M2, GDP, inflation and OPR. In general, M1 has been ranging between 4-6% with exceptions in 2012 (13.1%), 2017 (11%), 2020 (15.7%) and 2021 (10.4%). M3 has not shown wide divergences as M1. Printing money has been where we needed to reflate the economy. In the context of the above, we have a lagged effect of a year or so, especially in 2020 and 2021 primarily because of the MCO. There were several Penjana/stimulus packages (because of the MCO) and these were supposed to reflate the economy. Money supply and interest rates have an inverse relationship. A larger money supply lowers interest rates.

In the second chart, we are doing a cursory look at CPI (transportation), CPI (Food), deposit rates and OPR. The line on CPI (transportation) seems amplified with sharp swings with GDP. If GDP is subdued, then transport cost tanks, example in 2020 in the midst of Covid-19. And when the economy is on a recovery mode, transport cost goes up, 2021 or 2017. The CPI (food and non-alcoholic beverages) impacts the B40 group. And there are cases where it exceeds deposit rates (2013 to 2017 and in 2021). That is negative interest rate and savers are penalised. That again impacts our exchange rate. 

Not shown above is the velocity of money circulation (nominal GDP to M1).  Traditionally, it is viewed as a constant. Prior to 2020, this has been in the range of 3.11 to 3.39 (for 2012 to 2019). In 2020 and 2021, this declined to 2.71 and 2.62 respectively. What does this mean? Subdued economic activity owing to the MCO has impacted the number of times money changes hand (velocity). It may recover in 2022.

BNM has greater ability and data to monitor the issue of growth, interest rate, exchange rate. Hopefully, they have the wisdom and courage to act ahead of the curve! And so do anticipate more upward revision of the OPR.

References:

Where inflation and interest rates intersect, Heather McArdle, S&P Dow Jones Indices

BNM Annual Reports

The Malaysian Economy in Figures, EPU

Trading Economics (www.tradingeconomics.com) 

How Does Inflation, Interest Rates Impact Foreign Exchange?

Inflation is the rate at which relative prices for goods and services increase. At first, this sounds like a simple concept, but actually it is rather complex. Inflation affects numerous aspects of the market and many factors influence it. Inflation is measured using several different price sources, with the Consumer Price Index (CPI) and the Producer Price Index (PPI) being two of the core metrics. The CPI measures the price changes in consumer goods and services. Prices on goods like cars, clothing and food are measured from the purchaser’s point of view. The PPI measures the price changes in goods and services by domestic producers from the seller’s viewpoint.

If prices go up, the current value of the currency is eroded. What could have been purchased a year prior for RM1.00 might now cost RM1.20, and if salaries had not risen in tandem with this inflation, the public would have lost purchasing power. From this vantage point, some may see inflation as a bad thing. However, the right balance of inflation and economic growth is important for a healthy economy. An economy that grows too fast can cause high rates of inflation and an economy with slow or no growth can cause low levels of inflation or even deflation (when prices decline). Inflation is one of several key factors that are considered when interest rates are set by a central bank. Interest rates determine the cost of borrowing and dictate savings, mortgage, and car loan rates, among others (see Exhibit 1 for U.S. inflation and interest rates). 

In general, economies are expected to grow—not stay the same or slow down. A growing economy (possibly caused by low interest rates) can cause inflation, as consumers in these economies typically feel confident about the future and spend more money. Sellers anticipate this demand and raise prices, creating inflation. This is also known as “demand-pull” inflation. When supply is not keeping up with demand, prices can become even higher. If consumers expect further inflation in the future, they may make purchases sooner in order to avoid higher prices down the road, which in turn benefits economic growth. 

In contrast, inflation can occur even without economic growth. An increase in the cost of business can cause inflation as well. If manufacturers slow output while demand remains the same, then prices will go up as a result of basic supply and demand principles. Manufacturers could slow down due to higher wages, new taxes or an increase in the cost of exports (foreign exchange or FX cost). This is known as “cost-push” inflation. 

The rate of inflation influences the direction of interest rates and, conversely, interest rates influence the direction of inflation. 

Expansion in the money supply is another major cause of inflation. This occurs when the government or central bank introduces additional money into the economy to spur spending and growth, but the level of production of goods and services remains constant. More money in the economy generally causes increased demand, and this demand chases the same amount of goods. Therefore, prices go up in order to avoid a shortage of supply. In this scenario, inflation erodes the value of money and purchasing power decreases. 

A government can also add money into the economy through the purchase of bonds in the marketplace, which is commonly called quantitative easing (QE). The goal of QE is to inflate prices of bonds so that yields decline, consequently keeping rates low to spur easy lending and growth in the economy.

The rate of inflation influences the direction of interest rates and, conversely, interest rates influence the direction of inflation. If inflation is high, interest rates will typically be raised by the central bank to slow economic growth. If inflation is low, economic growth is generally low, and a decrease in rates is enacted in order to lower the cost of borrowing and to spur economic growth. More borrowing power can lead to spending, a stronger economy and, ultimately, inflation. The central bank has the task of finding the right balance of tweaking interest rates to manage growth and keep unemployment low and wages high. The Federal Reserve also has to avoid promoting too much growth, which could lead to high inflation. Generally, a central bank tries to keep inflation within the 2%-3% range.

When interest rates are increased to tame inflation, foreign capital is usually attracted to the higher rates compared with other countries, and there is more investment in the higher rate environment. This causes the exchange rate to rise. However, if inflation is high (diminishing the purchasing power of that currency), the rise of the currency could be limited. If rates go lower, the opposite is generally true and the currency is likely to suffer (see Exhibit 2)

Source: S&P Dow Jones Indices LLC. For illustration only

Although the above diagram simplifies things, other reasons for exchange rate fluctuations include:

• Trade balances (surplus/deficits);

• Capital flows (inflows/outflows);

• Speculators who create “artificial” demand/supply;

• Productivity improvements (or otherwise);

• Forex reserves of the central bank;

• Private/public investments; and

• Relative GDP growth

For us to reach parity with the Singapore dollar, there are a whole range of changes required. But that is unlikely in the current political climate. Meanwhile, inflation could be described as a monetary phenomenon as much as a cost-push issue arising from supply disruptions. Whatever the case, the poor and wage earners are impacted by rising prices unless the Government works-out short-term and long-term measures soon.

References:

Where inflation and interest rates intersect, Heather McArdle, S&P Dow Jones Indices

BNM Annual Reports

The Malaysian Economy in Figures, EPU

Trading Economics (www.tradingeconomics.com) 

Can We Abolish All APs, Import Permits and Certifications?

Prime Minister Datuk Seri Ismail Sabri Yaakob’s decision to abolish food import approved permits (AP) is laudable. It may dent rising food prices. APs to import beef and cattle were removed earlier but anyone can import whatever food items to ensure sufficient supply.

However, the removal of APs on food products is only partial where strategic staples like rice are still under a monopoly by Bernas. In addition, although APs have been removed, companies still require an import permit (IP).

The effect of Prime Minister Ismail Sabri’s lifting of APS on meat products strengthens the hands of some JAKIM officers to control the halal certification of meat processors and exporters to Malaysia. If other Muslim countries like UAE or Saudi Arabia have certified it, then why do we have to do it?

Source: https://www.freemalaysiatoday.com

The Government should do away with motor vehicle APs, import permits, JAKIM certification (where applicable) to reduce elements of corruption.  AP holders have been enjoying special privileges and instead of benefiting the people, the policy only benefits and enriches certain well-connected individuals, at the expense of consumers.  The majority are cronies.

Competition in the open market will drive down the cost of imported goods.  Similarly, remove special exemptions for the national cars as well. We want prices to drop and consumption to increase!

Instead of relying on an obsolete AP system, the Government should embark on steps to help industries grow so that they could tide over the COVID-19 triggered economic downturn. Otherwise have a cess fund from APs to support deserving private businesses. We can provide local manufacturers with funds for innovation and technology upgrades, including  production facilities. 

Although the removal of all APs was advanced by Kepong MP Lim Lip Eng, it should include removal of JAKIM certification (where feasible) on food items. A national agenda to improve our competitiveness in the local and global markets must include removal of out-dated APs, import permits and certification. For too long a select group have “enjoyed” the “toll” without lifting a finger. Why perpetuate an inefficient system for the benefit of a select few?

References:

Abolish AP for other imports too including vehicles, DAP tell PM, G Vinod, Focus Malaysia, 19 May 2022

Ismail Sabri lifts APs on meat, leaving the nation’s food security at the hands of corrupt JAKIM officers, Murray Hunter, 20 May 2022

Why the Ringgit Cannot Close the Gap on the Singapore Dollar!

The Singapore dollar hit an all-time high against the ringgit in early May, as Malaysia remained slow to respond in the post-pandemic recovery phase. Some may say a weakened ringgit would attract Singaporeans to come to Malaysia and spend, this is a fool’s argument. Why? It suggests that we should go the way of the Turkish lira, Sri Lankan rupee or the Zimbabwe dollar. In all cases, it is not something we can look forward to.

The Singapore dollar has steadily increased in value against the ringgit since March. (Xe.com chart). A weaker ringgit naturally means that imports would be more expensive and will lead to higher imported inflation while a strong local note means higher purchasing power when abroad. Malaysia’s high food net import bill (RM60b), increases further the weakening of the ringgit.

Singapore’s currency has been benefitting from a combination of a safe haven status, a risk-off environment amid rising global uncertainties, and tightening monetary policy by Monetary Authority of Singapore (MAS). A further escalation in the Russia-Ukraine war, the rise in inflation and economic uncertainties, as well as monetary policy differences will benefit the Singapore dollar.

There is an interesting argument that had Malaysia not terminated the Currency Interchangeability Agreement (CIA), 1967 in 1973 our ringgit would be at par with the Singapore dollar. That will not be the case, because Singapore would have terminated the agreement because of the divergence of domestic policies and external impact on the two currencies. It would be tension between BNM’s objectives and that of MAS.

The immediate reasons for the widening gap between the ringgit and the Singapore dollar include: relative GDP growth; inflation; interest rates, trade balances; speculative forces, currency flows/capital account; money supply; forex reserves, productivity changes, consumption and private investment, amongst others.

But can we ever catch up with the Singapore dollar? The answer for today is no, unless we are prepared to do the following:

• Good education for the future-not focused on language and narrow political pursuits;

• Harmony amongst all Malaysians – not “ketuanan”, religion and race; 

• Innovative (and creative people) with R&D funding for commercialisation of inventions;

• Strong infrastructure/connectivity;

• Large savings, strong reserve currency and low foreign debts;

• Competitive and increasing share of trade; and

• Leadership in inclusive development with no tolerance for corrupt practices.

I have summarised and paraphrased the key points of Ray Dalio in his book “Principles for Dealing with Changing World Order”. But are we prepared to take those giant steps?

References:

Can the ringgit close the gap on the S’pore dollar? Nicholas Chung, Free Malaysia Today, 

15 May 2022

Principles for dealing with the changing world order: Why nations succeed and fail, Ray Dalio

SGD1 will always be worth RM1 if Malaysia didn’t terminate this agreement with Singapore, 

(https://newswav.com/A2203_gFwcb8)

Is There a MRT3 Business Model?

The PKR lawmaker, YB Chang Lih Kang (MP, Tanjong Malim) alleged that the financing entities and operator for rail projects, Prasarana Malaysia Berhad and DanaInfra Nasional Berhad, had breached their debt levels. The government loan guarantees for DanaInfra and Prasarana have breached RM110 billion and are expected to rise further with the MRT3 project, according to Chang. Both DanaInfra and Prasarana recorded debts at RM76 billion and RM38.9 billion respectively by June end 2021 Additionally, he claimed that the performance of the MRT1 project could provide a projection for the MRT2 and MRT3.

This is about 60.3 percent of total off-budget government committed guarantees. In early March, the Finance Ministry committed up to RM50 billion in financing for the MRT3 project. Chang alleged that similar to MRT1 and MRT2, the RM50 billion cost for MRT3 will likely be financed by a government loan guarantee under DanaInfra. DanaInfra’s debt will breach the RM126 billion with the implementation of the MRT3 project, which is approximately 40 percent of the country’s budget for 2022.

Chang claimed that if the ridership for the MRT2 and MRT3 projects did not match the government’s expectations, Prasarana would not be able to sustain itself. Tanjong Malim MP Chang Lih Kang Further, Chang claimed that the auditor-general had flagged DanaInfra in its 2018 report as one of the five companies that could not fully service loans accordingly.

Public transportation may not be highly Profitable but construction and operation of the rail

infrastructures must be funded by sustainable means. Is there massive TODs, or some other property development planned? The government must halt its implementation of the MRT3 project in order to allow more scrutiny over the project by the parliamentary select committees and independent financial and technical consultants to review.

Reference:

Citing debt, PKR MP questions MRT3 financial model, Alena Nadia, Malaysiakini, 16 May 2022

Ramli Burger Shames Controversial Bumiputera Companies

Simplicity and humility are key ingredients to success. Many large PLCs have “lost touch with reality” because they are embroiled with politicians, greed and adulation. Datuk Ramly Mokni and Datin Shala Siah Abdul Manap of Ramly Burger fame exude simplicity and humility in their business. 

Ramly Food Processing Sdn Bhd was founded in 1984. This was after five years Ramly started to flip hand-made burger patties from his flat in Lorong Haji Hussein, Kuala Lumpur. In 2019, Ramly’s annual sales hit RM1 bil and the company targeted 20% growth even at the height of the COVID-19 pandemic in 2020. The Ramly Group will also invest more than RM500 mil to expand their production capacity as they aim to produce 6 million burger patties a day. This is six times more than what the company is currently producing daily and 60 times more than when they first started which was 100,000 burger patties a day.

Source: https://focusmalaysia.my

When he first started, Ramly applied for a loan of RM7,000 from Majlis Amanah Rakyat (MARA) but was rejected. Although feeling dejected, the former butcher at a supermarket refused to give up – he slogged to start his business with just a capital of RM2,000 and produced 200 burger patties on a daily basis. In view of lack of funding, he created these patties manually with the help of his wife by using his hands and knives at home.

Although his product was not well-received initially, Ramly persevered – he later opened his own burger stall near Chow Kit and started selling cooked and uncooked patties. He further tweaked the flavour of his patties to the liking of the local palate. The demand for their patties then grew with the couple started producing 3,000 meats per day or 15 times more of what they originally produced a day. And the rest as they say is history.

The idea of listing Ramly Burger may enable the company to grow significantly, but that risks losing control of the company. What a sordid legacy for generations to come.

The empire of Ramly has already opened up opportunities for almost 30,000 micro-entrepreneurs, but they’re aiming to reach 100,000 of them. “If a business can sell about 100-200 burgers a night, it means they can earn a net profit of RM200 a night. Imagine if they can sell 1,000 of them.”  “And if they go up to 3,000 a night? If their net profit is RM1 per burger, it will be RM3,000 per night. They can actually achieve almost RM10,000 a month,” he calculated in an interview with Berita TV9. From the way he put it, it seems like starting a Ramly burger stall sounds pretty lucrative. But then again, it’s important to take into consideration the initial startup cost, which is estimated to be around RM5,000 to RM6,000. 

With their current production of 1 million patties a day, 70% goes to the local market whereas 30% is exported.  Their products have been exported to Thailand, Singapore, Bangladesh, Vietnam and Indonesia. There are already 16 Ramly Halal Marts and 12 Ramly Halal Kiosks in the country, but Ramly wants to expand to 450 branches in the next few years. 

Perhaps Sapura Energy and Serba Dinamik could learn something from Ramly Burger – humility and simplicity?

References:

How humble Ramly Burger founder can put Sapura, Serba to shame, Cheah Chor Sooi,

Focus Malaysia

Encouraging the bloom of small businesses, Faye Lee, Vulcan Post, 19 Nov 2020

Ringgit Dives to RM4.40 Against Greenback!

The ringgit has slid further to RM4.40 against the US dollar. This is the lowest since March 2020. Why? Because of hawkish stance by the US Federal Reserve (Fed) to tighten its monetary policy. The ringgit hit a record low on March 23, 2020, when it reached RM4.447. 

The current context is largely about higher interest rates in the US and relative inflation outlook. 

The Fed chair Jerome Powell said the Fed would keep raising rates until inflation comes down. They (central banks) are also likely to tighten monetary policy as inflation seems to be pervasive. Major central banks are in a tough spot as they need to weigh between rising inflationary pressures and economic growth. 

Recession may seem be the buzzword and that has resulted in higher demand for risk-free assets such as the US Treasury bonds. The export ban of agrofood-related products by certain jurisdictions is expected to amplify the extent of inflationary pressures. Hence, foreign exchange players would continue to remain in safe-haven currencies.

Prime Minister Datuk Seri Ismail Sabri Yaakob announced recently the Government would abolish APs for food imports with immediate effect to contain rising food prices. Previously, there were APs to import beef and cattle but these are no longer required and anyone can import whatever food items to ensure sufficient supply. Malaysia’s net food import is worth about RM55-60 bil annually. Given the scarcity of several food items due to the war in Ukraine and sliding ringgit, the country’s annual food import price tag is projected to escalate.

It is in this context that BNM must lay-out a strategy to manage exchange depreciation, even with improvements in commodity prices. BNM’s usual statement is we will “smoothen” any downward pressure on the ringgit. And again, we don’t have sufficient USD reserves to defend it.

Our reserves stand at USD115.6 bil as at 31 March 2022. Singapore has forex reserves at USD365.2 bil as at April 2022. This equals 8.7 months of retained imports. Foreign exchange reserves of the top 10 countries are shown below:

Top 10 countries: Foreign Exchange Reserves (USD)

It is remarkable that India, South Korea, Hong Kong who went through difficult periods previously have augmented their reserves. We don’t have sufficient reserves to ward-off speculators. They will attack our narrowly traded currency in uncertain periods. Then again we have serious structural issues.

It is in this context that the former PM, Mahathir has weighed-in by suggesting re-pegging the ringgit at RM3.80 to the U.S. dollar. He believes in fixed exchange rate and the gold standard. This ship left in 1971, and he failed to board it. Re-pegging will mean capital controls and will also drive foreign (and local) investments away.

What can BNM do? In the immediate, is to move OPR up by 1.0% which will create sufficient differential with U.S. interest rates, bring inflation down, set the tone that BNM is serious on inflation, and then focus on structural issues and supply disruptions. But will we do that?

References:

Ringgit dives to RM4.4 against greenback, lowest since March 2020! G Vinod, Focus Malaysia, 19 May 2022

Ringgit pegging not in Malaysia’s interest, poses ‘great risk’ – BNM governor, Syafiqah Salim, The Edge Markets, 13 May 2022

Why Must Elon Musk Buy Twitter?

Twitter originally accepted Elon Musk's $44billion bid to buy the social media giant, with the Tesla and SpaceX boss pledging to boost free speech on the platform.

Mr Musk, the world's wealthiest person and a prolific Twitter user, has a controversial past with the app.  More than 300 million people, including many world leaders use the service.

Source: https://help.twitter.com

The business tycoon, who is worth $267 billion, has more than 84 million followers on Twitter and tweets several times a day. He insists his takeover is not motivated by economic reasons, but rather out of a desire to safeguard Twitter as a venue for free speech. The billionaire self-identifies as a 'free speech absolutist' and believes Twitter has failed to live up to its free speech principles.

Free speech is essential to a functioning democracy. Do you believe Twitter rigorously adheres to this principle?' Musk asked via a Twitter poll. Musk's view that Twitter excessively censors some of its users is popular on the political right. 'Woke warriors' and Left-wing organisations have lashed out at the deal because “hate” may now flourish. 

In recent weeks, Musk has proposed relaxing Twitter content restrictions, while ridding the platform of fake 'spambot' accounts and shifting away from advertising as its primary revenue model. Musk believes he can increase revenue through subscriptions. 

Asked during a recent TED interview if there are any limits to his notion of 'free speech,' Musk said Twitter would abide by national laws that restrict speech around the world. Beyond that, he said, he'd be 'very reluctant' to delete posts or permanently ban users who violate the company's rules. He is said to instead favour temporary 'timeouts' for users who break the new rules.

Like most of Silicon Valley, employees of Twitter generally lean to the left, making them immediately more likely to be sceptical of Musk than those on the right. 

Then there is the issue of job security and the new working environment under Musk. While Twitter has guaranteed staff their jobs for the next six months and said 'no layoffs are planned', once the Tesla boss takes over any HR decisions will be up to him. 

Twitter currently has an option for staff to work from home, and internal messaging boards are now alight with fears Musk will now axe the policy. The entrepreneur has a contradictory approach to WFH, lashing out at stay-at-home orders during the early days of the pandemic and reopening his factories in the face of official opposition, but later saying staff did not have to come in if they felt uncomfortable about doing so. Musk is well known as a micromanager who has regularly slept on the floor of his factories, so he may become frustrated if he feels staff are not showing similar dedication. 

Twitter investors have for years been concerned with the company's slowing revenue growth. Its last quarterly results showed revenue had grown slower than expected, despite increasing by 22% to $1.6bn in the last three months of 2021. However, daily active users rose by 25 million in the year to 217 million, and the company aims to hit 315m by the end of next year. Despite some headwinds, Musk's huge $264.6bn fortune looks perfectly capable of financing Twitter long into the future. 

To purchase Twitter, Musk is said to have raised $25.5bn in debt, including a margin loan of $12.5bn against his shares in Tesla, from a group of banks led by Wall Street bank Morgan Stanley. He has also vowed to provide $21bn in equity financing for the takeover, which leaves him on the hook for more than 70% of the purchase price unless he finds other backers. 

There is nothing fundamentally wrong on the proposed acquisition. However, it is a question of where “free speech” ends and responsibility begins. Is this a right-wing takeover of social media? Also, as in all acquisition, there will be no GDP increase unless there are areas to improve revenue. And it is perhaps the financial returns from this venture has made Musk to press the “pause” button for now.

Reference:

Why has Elon Musk bought Twitter? Who are the winners and losers? Why are staff unhappy? And how will the social media giant change after $44 billion deal? Rory Tingle MailOnline, 26 April 2022

Is Netflix in Trouble?

Netflix’s share price has tumbled after it announced a net loss of 200,000 subscribers globally, and expects to lose a further two million over the next three months. Its share price slid more than 35% in early trading on April 20, wiping around $55bn (£42bn) off its value.

The headline failure for Netflix is a reduction in subscribers for the first time in a decade. Wall Street analysts had been expecting it to announce growth of about 2.5 million new customers, and were stunned when the company instead confirmed more had cancelled than joined.

Source: https://play.google.com

Around the world, Netflix has 222 million subscribers. In its biggest markets, however, it has an appreciable portion of all households: in the US and Canada, 75m out of a total 142m households have a subscription to Netflix. 

Netflix has been increasing its monthly fees sharply around the world, with some UK subscribers now paying a third more than they were less than two years ago for the same service. But the company says it has been happy with the results, saying the rises “remain significantly revenue positive” – and thinks it still has “among the best retention in the industry”. Netflix also points out that, were it not for the war in Ukraine, it would actually have gained subscribers: it suspended services in Russia, losing 700,000 accounts in the process.

However, Netflix is exploring the possibility of a soft price cut, in the form of an ad-supported tier. A cheaper subscription funded by adverts could help expand Netflix into households and regions that had previously been unable to afford the service at full price.

Netflix estimates 100m households globally access its services through password sharing. For years, it has tacitly allowed the practice, which functions as an effective discount.

But now, it has started experimenting with stricter controls to try to turn some of those additional households into customers in their own right.

In trials in some South American countries, Netflix has simply started to ask subscribers to pay a small additional fee, about $3 a month, if they share their service with people outside their household.

The deeper question for the company is whether it needs to change its actual product, rather than simply fiddling with price points and subscription tiers. Unlike many of its competitors, Netflix has focused almost entirely on a relatively narrow slice of original and licensed film and TV. 

Competitors such as Amazon, Apple and Disney have looked to include sports, news and light entertainment in their wider packages. A 2018 report suggested Netflix was exploring news programming, but the company instead appears to have gone down other routes – launching a free gaming service for subscribers. Netflix’s troubles are a warning sign for its peers and competitors. After watching millions of customers abandon pay TV for streaming, US entertainment giants merged and restructured to compete with Netflix. Investors encouraged this strategic shift, boosting shares of companies like Walt Disney Co that demonstrated a commitment to streaming.

Netflix remains well ahead of most of its competitors outside the US, and is the largest streaming service in the world. The company believes it can execute its way out of the current predicament by luring new customers with better programmes and finding more ways to charge its existing user base. The company still expects to add customers this year, and will have a stronger slate of new shows in the back half of the year. Whether Wall Street believes that is up for debate.

References:

Why is Netflix losing so many subscribers and what can it do to about it?, Alex Hern, UK Technology Editor, The Guardian, 20 Apr 2022 (https://www.theguardian.com)

Netflix breaks its own rules as subscriber losses batter shares, Lucas Shaw & Subrat Patnaik, 

Bloomberg, TheEdge CEO Morning Brief, 21 April 2022

Russian Oligarchs: Where is Their Dark Money?

US think tank the Atlantic Council says that Russians have about $1tn (£750bn) in "dark money" hidden abroad. Its 2020 report estimated that one-quarter of this amount is controlled by Russian President Vladimir Putin and his close associates - wealthy Russians known as "oligarchs".

Another US think tank, the National Endowment for Democracy (CIA sponsored), says Putin has encouraged close associates "to steal from the state budget, extort money from private businesses, and even orchestrate the outright seizure of profitable enterprises". It says that in this way, they have built up personal fortunes running into the tens of billions. 

Russian opposition leaders Boris Nemtsov and Vladimir Milov have claimed that between 2004 and 2007, $60bn was transferred from oil giant Gazprom's funds to Putin's cronies. The Pandora Papers, released by the International Consortium of Investigative Journalists, notes that people close to Putin have become very wealthy - and could be helping him move his own wealth around.

Source: https://news.yahoo.com

Historically, much of this money had gone to Cyprus - enticed by favourable taxes. To some, the island became known as "Moscow on the Med". According to the Atlantic Council, $36bn (£27bn) of Russian money went there in 2013 alone. Much of it arrived via shell companies, which are used to obscure the true owners. In 2013, the International Monetary Fund persuaded Cyprus to close tens of thousands of bank accounts held by shell companies.

The British Virgin Islands is also a favourite haven for Russian money.

A report by Global Witness said that in 2018, Russian oligarchs had an estimated $45.5bn (£34bn) in these tax havens. Some of this money finds it way to financial capitals such as New York and London, where it can be invested and reap returns.

The anti-corruption organisation Transparency International claims that at least $2bn (£1.5bn) of UK property is owned by Russians accused of financial crime, or with links to the Kremlin. The breadth of Russian money laundering was further exposed in a 2014 report by the Organized Crime and Corruption Reporting Project into the "Russian Laundromat". It said that between in 2011 and 2014, 19 Russian banks laundered $20.8bn (£15.6bn) to 5,140 companies in 96 countries.

The usual way that Russian oligarchs hide their "dark money" abroad is through shell companies. These oligarchs hire the best lawyers, auditors, bankers, and lobbyists in the world to develop legal means to conceal and launder their funds, says the Atlantic Council.

A serious oligarch has layers of anonymous shell companies in a score of offshore jurisdictions, and his funds move at lightning speed between them. In 2016, the International Consortium of Investigative Journalists published the Panama Papers, which showed one company alone had set up 2,071 shell companies for wealthy Russians.

Following the invasion of Ukraine, countries have announced a series of measures to track down Russian money. The US is setting up a new "KleptoCapture" task force to crack down on the finances of Russia's oligarchs. It will be run by the Justice Department and is meant to seize assets obtained through unlawful conduct. The UK government has taken steps to increase its use of Unexplained Wealth Orders (UWOs), which oblige people to prove where they got the cash to buy assets in the UK.

Account Freezing Orders (AFOs) allow courts to freeze funds in a bank or building society if they suspect the money is linked to criminal activity. And the U.K. government has approved the Economic Crime Act, with a register of beneficial ownership for property owned by overseas entities. The UK has also scrapped its "golden visa scheme", which gave residency rights to wealthy foreigners if they invested large amounts of money in the country.

Malta, a favourite haven for Russian money, has also scrapped its "golden passport" scheme which allowed oligarchs to buy citizenship. Cyprus and Bulgaria scrapped their golden passport schemes in 2020.

The problem is not just Putin. It is also the West. Why accept these funds when you know full well that these are laundered funds. It is hypocritical of New York, London (and other financial centres) to say they hold high standards when money flow and investments prove otherwise.  That’s how Malaysian elites can scheme and move funds around when these centres (including Singapore) behave as prostitutes!

Reference:

Russian Oligarchs: Where do they hide their “dark money”? BBC, 28 March 2022

https://www.bbc.com 

South Korea’s Chaebols: Does It Serve A Purpose?

The chaebol structure is a business conglomerate system that originated in South Korea in the 1960s. Chaebol is an English transliteration of the Korean word 재벌, which means plutocracy, rich business family, or monopoly. The chaebol structure can encompass a single large company or several groups of companies.

• Chaebols are owned, controlled, and/or managed by the same family dynasty, generally that of the group's founder.
• Samsung, Hyundai, SK Group, and LG Group are among the biggest and most prominent chaebols.
• Critics say chaebols impede the development of small and medium-sized businesses and may have a big impact on the country's economy if they fail.

Source: https://koreaexpose.com

South Korea's chaebols represent a group of large business entities that are very important to the nation's economic structure. Investment in South Korea's research and development (R&D) is largely driven by chaebols. Chaebols represent roughly half of the value of the country's stock market. They are generally industrial conglomerates that are made up of different affiliates.

Chaebols are owned, controlled, and/or managed by the same family dynasty, generally that of the group's founder. Family members are usually placed in management positions, which gives them more control over the way the businesses operate. Although some of the originating families are not necessarily majority stakeholders in the chaebols now, they may still have some association with them.

There are roughly two dozen well-known family-owned chaebols that operate in the South Korean economy. Samsung, Hyundai, SK Group, and LG Group are among the biggest and most prominent chaebols. These companies account for more than half of the country's exports. And together, they help bring in the majority of South Korea's capital from foreign sources.

 

The chaebol structure is often compared with Japan's keiretsu business groups, but there are some fundamental differences between the two. Chaebols are generally controlled by their founding families, while keiretsu businesses are run by professional managers. Chaebols ownership is also centralized, while keiretsu businesses are decentralized.

A charge often leveled against the chaebols is that they have impeded the development of small and medium-sized businesses in South Korea, creating massive imbalances in the economy. While the South Korean government has made occasional attempts to curb the power and influence of chaebols over the years, these efforts have met with mixed success.

Another concern about chaebols is that consolidating significant market resources into these conglomerates puts the economic stability of South Korea at risk should they fail. Samsung, for example, on its own has grown to represent some 20% of the gross domestic product (GDP) in South Korea.

Chaebols are often accused of hoarding profits and expanding their operations and factories overseas rather than reinvesting in the domestic economy. This is contrasted by about 90% of workers in the country working for small and medium-sized businesses, meaning a small portion of the overall population is employed by conglomerates that hold considerable sway over the country’s economy.

The concentration of market power and reliance on chaebols has made South Korea dependent on these conglomerates to the point where the government has to support these entities during financial crises. This is also problematic as smaller, more nimble businesses from other countries offer more competition.

Though chaebols often comprise a multitude of business units with extensive manufacturing capabilities, the sheer size of the overall organization can be a detriment when swiftness is needed. Furthermore, their ability to innovate and grow may not keep pace with the speed and dexterity of smaller companies from other nations. When chaebols suffer from such slow or stagnating growth, the effects can be felt significantly across large segments of South Korea’s economy.

For Malaysia, this is not the way forward, although Mahathir dallied for a while with large trading companies following his “Look East” policy. The GLCs are the next best to chaebols and where they are profitable, they are owned by PNB or Khazanah. Otherwise, they are probably part of MOF Inc. For too long the GLCs have been a “law to itself” – not sufficient oversight and governance, unless they are listed on the Bursa. There is a need for a re-think of the vast array of GLCs and GLICs to move the country forward. Will we do that?

Reference:

Chaebol Structure, Will Kenton, https://www.investopedia.com        

Is the Dollar Dying?

 Some say we are nearing the final days of the dollar’s reign as the world’s reserve currency. The greenback has lost 11 percent of its value since the beginning of the coronavirus crisis. It may lose another 10 percent in 2022. The Federal Reserve lifted its key interest rate by a quarter of a percentage point to combat inflation. At the same time, policymakers projected six more rate hikes this year. These moves should slow the inflation rate and economic growth by driving up interest rates on all borrowings.

But America has a bigger problem than inflation and rising mortgage rates. The federal debt load recently passed $30 trillion. Hence, interest rate hikes add billions of dollars to the sum America owes its creditors. In 2021, the government paid $562 billion in interest—more than $1,500 for every man, woman and child. And it stands to pay much more than in 2022 if the Federal Reserve raises interest rates six times.

Source: https://crowdwisdom.live

Nearly 60 percent of the $12.8 trillion in global currency reserves are dollars. This gives the United States the ability to borrow cheap money since dollars are always in high demand. But were the dollar to lose its reserve currency status, the federal government would no longer be able to borrow money cheaply.

Financial historian Niall Ferguson warns that nations and empires often fall when the costs of servicing their debts exceed the cost of defending their borders. The U.S. is close to this tipping point. China, Russia and Saudi Arabia are realising this fact. So they are targeting the dollar’s reserve currency status.

Both China and Russia have been reducing their dependence on the dollar for bilateral trade since 2014. Some analysts predict that these powers will start dumping more dollars in retaliation against U.S. sanctions on Russia over the war in Ukraine. China, India and Russia are already exploring an alternative to the U.S.-dominated SWIFT payment mechanism. Such an alternative payment mechanism would be a significant blow to the dollar’s status as a global reserve currency.

Many nations besides China, India and Russia would join. Saudi Arabia is also talking with China about pricing some of its oil sales in yuan instead of dollars. If they reach an understanding on this issue, it would end an agreement U.S. President Richard Nixon struck in 1973. America promised to arm and protect Saudi Arabia if Saudi royals would denominate all future oil sales in dollars. But now, Saudi royals want yuan-denominated oil sales.

Suppose China, India, Russia and Saudi Arabia stopped using the dollar. The greenback would then become an isolated North American currency that is barely needed in the Eastern Hemisphere. Banks would stop accumulating dollar reserves. The U.S. government would have to offer high interest rates if it needed to sell treasury bonds to borrow money. It would have to enact high tax rates to pay the interest on those treasury bonds.

The U.S. has been living beyond its means for decades. It can no longer escape the debt death spiral that awaits it. The onset of such a death spiral might not mean the immediate end of the U.S. as a nation. But it would mean the immediate end of the U.S. as a financial and military superpower.

It is in this context that it (U.S.) may well provoke a war in East Asia. Some say before 2030. That could even end in nuclear holocaust for all. The war machine of the likes of Boeing, Lockheed-Martin, Northrop and the Pentagon would be delighted. U.S. cannot accept a new rival, be it Russia, China or some other state (EU?).That’s the Wolfowitz doctrine. Until the people of the U.S. realise this madness of endless wars, peace will not break out.

Reference:

The dollar is dying, Andrew Miller (https://www.thetrumpet.com), 22 March 2022

Malaysia’s Self-inflicted Food Crisis?

McDonald’s had a French fries shortage in February. This was perhaps symbolic of a much bigger problem. Many food items are in short supply and subject to rapidly rising prices. Some analysts claim that rising prices and shortages are the result of supply chain glitches, natural disasters, and labour shortages. However, the food crisis cannot be just a cyclic issue as there are deep structural issues involved.

Malaysia imports nearly 60% of its food needs. Consequently, food security is a major issue. In 2019, Malaysia produced only 46% of its vegetables, 70% of its rice, 61% of its fruits, 25% of its beef, 11% of its mutton, and 5% of its dairy requirements.

Source: https://www.thesundaily.my

The food import bill in 2020 was RM 55.5 billion. Five million hectares of land is cultivated with palm oil, and 1 million hectares with rubber, while only 1 million hectares are utilised for food production, mostly by smallholders.

The mentality in Putrajaya has been that the value of commodity exports far exceeds the nation’s food import bill, thus alleviating any need to bump up local food production. However, Putrajaya’s solution was for agriculture development to be led by government agencies and GLCs. This has resulted in wastage of money and resources.

Bureaucrats and consultants have untenable ideas like creating padi estates. The latest idea is smart farming, with high intensity investments in technology benefitting consultants.

There are interested parties now for the broiler industry. It has been hit with rising feed prices, substantially adding to production costs. The maximum price of RM9.10 per kg retail (in 2021), well below the current poultry (chicken) monthly price of US$2.89 (RM12.40) per kg on the Mundi Index.

The government’s maximum price has caused companies producing chicken for the wholesale and retail markets to cease production. Other producers have switched to producing value-added chicken-based products not subject to price controls, or selling chicken through the black market.

The government has allowed some 35 companies to import chicken on a temporary basis to alleviate chronic shortages in the market. These highly sought-after import permits or APs were, according to industry sources, not given out fairly. A cartel of companies is now preparing to enter the market as producers, once existing producers have closed down. A local newspaper report also revealed that cartels dominated the daily market with 1.5 million chickens, which was 70% of the total 2.2 million sold nationwide every day.

The APs carry unrealistic terms and conditions. The import permits have taken months to obtain from the Department of Veterinary Services. Then with more permits there is always the hint of corruption.

The chicken supply chain in Malaysia is in somewhat of a turmoil. It was previously one of the best managed and self-sufficient farming sub-sectors in the Malaysian economy. But this is now almost destroyed due to the government’s price manipulation.

Companies using the APs are converting the chicken into finished consumer products that are beyond government price controls, or are sold on the black market. Regulation of the food industry has led to unwanted corruption and diversion to crony capitalism.

Restrictive market regulation is only presenting further opportunities for one’s own self-benefit. The Malaysia Competition Commission (MyCC) is now probing allegations that there was political interference in the issue of cartel operations in the poultry industry. But this is not the only case. There is allegedly the so-called extortion cartel at a highland resort.

A farmer is protected from prosecution for engaging illegals as workers. Monthly contribution mentioned is RM300-RM600 per worker. If a farmer defaults on payment, the entire crop is destroyed by the “recipients” of the donation. According to some, the “sheriff” of the Highlands lives in a “castle” on a hilltop! How wonderful, our local “sheriff” and Robin Hood episodes for a mini-series!

References:

Malaysia’s looming food crisis, Murray Hunter, FreeMalaysiaToday, 28 February 2022

MyCC probing allegations of cartels in poultry industry, Bernama/FreeMalaysiaToday, 

26 April 2022

Consequences of Indonesia’s Palm Oil Export Ban

Market analysts doubt Indonesia’s ban on its palm oil exports effective from Thursday (April 28) will ensure the country has an abundant supply of affordable cooking oil in its domestic market.  The move however is poised to raise crude palm oil (CPO) and other vegetable oil prices even further and worsening inflationary pressures.

CPO exporters in Indonesia may suffer as a result while downstream players with refining capacity could benefit as there would be a significant shift in the demand-supply mechanics. That’s the view of RHB Research.

There is no guarantee that there will be additional supply released to the market as CPO refiners may also decide to hold back their refined oil stocks to benefit from higher prices. Refined oils can be kept for as long as six to eight months with no impact to quality while after packaging, they can be kept for a further 12-18 months. Vegetable oil prices could spike as a result of this news but should Indonesia change its stance, this will also reverse quickly.

Meanwhile, Maybank IB Research expects the Indonesian palm oil export ban to worsen the tightness in global edible oil supply given the country’s position as the world’s largest producer and exporter with 31% of global exports in 2020.

As the industry enters into its seasonal peak output period in 2H 2022, this could trigger sharp price correction. 2022 will likely be a year of two halves for CPO price. CPO spot price has averaged RM6,248/metric tonne (MT) year-to-date.

Given the high prices and new export ban, Maybank IB Research expects 2022E/2023E CPO average selling price (ASP) to RM5,000/RM3,400 per MT (from RM4,100/RM3,200 per MT previously forecasted).

In the short-term, for Malaysia this is a good move but we need to examine what is the motive for Indonesia. Is it to reform its industry? To devolve control from a handful of conglomerates to small farmers? Will not Indonesia lose USD2.2 billion in export in one month? How will 30m metric tons of supply glut in Indonesia be handled? Will Malaysia release from its palm oil inventory of over 1.6 million tonnes?

There are several issues here and the winners are soybean and other vegetable oils in this instance.

References:

Indonesia’s palm oil export bank unlikely to achieve its intended objectives, Cheah Chor Sooi, Focus Malaysia, 25 April 2022

With ban on palm oil exports, Indonesia reaps condemnation and praise, Hans Nicholas Jong, 25 April 2022

What is Digital Banking? Is This The Way Forward?

The term digital banking, essentially, combines online and mobile banking services under one umbrella. Online banking means accessing banking features and services via your bank’s website from your computer. You may log into your account to check your balance or pay your electricity bill. You can access additional banking features, such as applying for a loan or credit card, via your online banking portal.

Mobile banking means using an app to access many of those same banking features via mobile devices such as smartphones or tablets. These apps are proprietary, issued by the bank where you hold your account, and usually use the same login information as your online banking portal.

Source: Focus Malaysia

Designed for people on the go, mobile banking apps tend to include the most used banking features, such as mobile check deposit, funds transfers and bill payment. They also often have convenient features like peer-to-peer payments through systems like Zelle. Banks also may use their mobile apps to send customers banking alerts such as fraud detection and low balance notifications.

Online Banking + Mobile Banking = Digital Banking

Online banking in the U.S. has its roots back in the 1990s. In October 1994, Stanford Federal Credit Union was the first institution to let its customers access banking functions via the new World Wide Web. Now estimated 80% of U.S. banks offer their customers the ability to bank online.

As mobile devices gained popularity and adoption, banks were encouraged to put their services at their own mobile banking apps. The FDIC has reported that 34% of Americans use mobile banking as their primary way of accessing their accounts.

Together, online and mobile banking create the digital banking umbrella, giving people access to banking wherever they may be.

For customers who appreciate the ability to stop by a branch to perform some of their banking functions, brick-and-mortar banks is the natural choice for their bank accounts. These traditional banking institutions also usually offer online access and a proprietary mobile app to make everyday banking functions as accessible as possible for their customers.

Digital banking offers a number of benefits for both consumers and business owners.

• Access. With both desktop and mobile access to your bank accounts available, digital banking means you’re not beholden to bank hours to manage your finances.

• Better rates and lower fees. With online banks driving fees down, consumers have choices beyond their local brick-and-mortar financial institutions. It’s easy to compare rates and fee structures to find the best bank for your needs.

• Equity. Upstart online banks level the banking access playing field by reaching unbanked and underbanked communities that rely heavily on mobile phones but may not have access to physical bank branches.

Digital banking, while highly convenient and easy to access, isn’t without its challenges.

• Downtime. If you rely solely on an online bank, you could be challenged to access your accounts should your bank experience an online or mobile app outage and there’s no branch for you to visit instead.

• Learning curve. For those who aren’t tech-savvy, online banking and mobile banking apps might be a bit much to digest.

• Security. There’s always the chance that your username and password could be hacked; however, online banks pursue the same degree of risk-reducing security protections, such as multi-factor authentication, as brick-and-mortar banks do.

Into this scenario, we have BNM approving five digital banking licenses (for Malaysia) out of 29 applicants. And these include:

1. A consortium of Boost Holdings Sdn Bhd and RHB Bank Berhad.

2. A consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd.

3. A consortium led by Sea Limited and YTL Digital Capital Sdn Bhd.

4. A consortium of AEON Financial Service Co, Ltd, AEON Credit Service (M) Berhad and MoneyLion Inc.

5. A consortium led by KAF Investment Bank Sdn Bhd.

P. Gunasegaram (of Malaysiakini, 3 May 2022) expressed caution on the changes taking shape, including the possibility of “a lot of damage” if these developments “fizzle out”.

This is a niche market and very much at an early stage globally. The digital banks are expected to commence operations in 12 months hence at the earliest. And many are anchored by strong shareholders. Also, give some credit to BNM in their evaluation. It is not some Muthu, Ali and Ah Chong consortium but real serious players. Let the music begin.

References:

What is digital banking, E. Napoletano,Daphne Foreman, Forbes, 24 Feb 2021 (

(https://www.forbes.com)

Comment| The dangers of digital banking, P. Gunasegaram, Malaysiakini, 3 May 202

The Ringgit, Inflation and Private Investment

The Minister of Finance (“MoF”) in The Edge Malaysia (2 May 2022) made a case in his article (somewhat similarly entitled) on the fine balancing act he has to perform during this Covid pandemic. Most MoFs are trapeze artistes or clowns. The new Sri Lankan MoF will attest to that!

There are several good points by the MoF. Supply chain, subsidies, inflation, interest rate, sovereign debt and exchange rate were all discussed. On the latter, he holds the view that for every 10 sen depreciation of the ringgit, GDP improves by 0.05%, exports are up by RM30.5 billion and current account surplus grows by RM800m. And GLCs with overseas investments have translation gain of up to RM7 billion. Does he not realise that this argument taken to its full measure must mean our ringgit should depreciate to say RM8 to the U.S. dollar then we will have everything in “hunky-dory” surplus and excellent outcomes? What crap! Just look at Turkey and where inflation is, 70%! Or, does he prefer Zimbabwe? Without going to the extreme, competitive depreciation will nullify any initial gains.

Source: https://dollarsandsense.my

The Hon. MoF goes on to say that “rather than focusing on a specific ringgit policy, the priority should be to implement structural reforms that will strengthen our economic potential and prospects to make Malaysia a more appealing investment destination”. Pray tell me how and what will you do? Are you going to do the following?

• NEP is discarded, including 30% (or 51%) Bumiputera equity requirement;
• Allocate fair budgetary sums for Bumi and Nons, or better still discard the division and just focus on all Malaysians according to their needs;
• Develop meritocracy  from education to employment;
• Re-calibrate  GLCs, universities, civil service to have Nons at all levels;
• Dialogue with private sector on their concerns. Malaysia’s private investment growth slowed markedly to 1.5% per annum in 2016-2021 from 12.1% per annum in 2011-2015. Private investment to gross domestic product (GDP) ratio also has fallen in recent years, from 17% in 2018 to 15% in 2021. In 2020, Covid-19 pandemic had caused a sharp decline of 11.9% in private investment before it turned around to increase moderately by 2.6% in 2021.

A host of obstacles are holding back private investment growth: weak global and domestic economic prospects; high operating, regulatory and compliance costs; distorted incentives and policies; the shortage of manpower; lack of financing for small and medium enterprises (SMEs); low profitability and return on investment as well as slowing foreign investment inflows. (All the above were cited by Lee Heng Guie, Starbiz, 5 May 2022);

• Improve FDI inflows? Net FDI inflows into Malaysia averaged US$8.3bil (RM36.13bil) in 2015-2020, which were significantly lower compared to US$82.5bil (RM359bil) in Singapore, US$17.4bil (RM75.75bil) in Indonesia, US$14.3bil (RM62.26bil) in Vietnam, while it is moderately higher than US$7bil (RM30.47bil) in the Philippines;
• Bureaucratic red-tape including APs for favoured people;
• Reduce corruption with Special Court and Public Prosecutors for corrupt practices;
• Place Malaysians with high integrity in institutions and banks; and
• Review the One-Stop Centre

Otherwise, we will be behind Singapore, Indonesia, Vietnam and the Philippines. But for now ahead of Laos and Myanmar. So, what do you say, MoF? Are you ready and “gung-ho” to start the structural reforms?

References

My say: Ringgit, inflation and the economy: A fine balancing act, Tengku Zafrul, The Edge Malaysia, 2 May 2022

Insight-voices of business: crying out for change, Lee Heng Guie, The Star, 5 May 2022

What Is Currency Depreciation? And Where is the Ringgit Headed?

Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals (e.g. GDP decline/negative), interest rate differentials, political instability, rise in inflationary risk, risk aversion among investors, negative perceptions, speculative activity (by banks and others), export decline, current account deficit, low forex reserves, a deficit fiscal position and major outflow of “political” or “hot” money.

Countries with weak economic fundamentals, such as chronic current account (and fiscal) deficits and high rates of inflation, generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further. This may lead many to pull portfolio investments out of the country. These actions will put further downward pressure on the currency. Some economists and Government sources suggest that depreciation is good, it improves export competitiveness. But this is a short-term phenomenon. The “J” curve will result in situation returning to its pre-depreciation state.

In many situations, easy monetary policy and high inflation are two of the leading causes of currency depreciation. When interest rates are low, hundreds of billions of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of currency depreciation. Central banks can increase interest rates to combat inflation, especially if it is of the demand-pull kind. 

Additionally, inflation can lead to higher input costs for exports, which then makes a nation's exports less competitive in the global markets. This will widen the trade deficit and cause the currency to depreciate. While economic fundamentals for the most part determine the value of a currency, political rhetoric can cause a currency to fall as well.

Between 2015 and 2016, the U.S. and China were repeatedly in a battle of words with regards to each other’s currency value. In August 2015, the People’s Bank of China (PBOC) devalued the country’s currency, the yuan, by roughly 2% against the U.S. dollar. Chinese officials said the move was required to prevent a further slide in exports.

In 2019, the Trump administration labeled China a currency manipulator, saying Chinese officials were purposely devaluing its currency, leading to unfair advantages on trade. In 2018, U.S.-China political rhetoric turned toward protectionism that resulted in a long-term trade dispute between the world’s two largest economies.

Sudden bouts of currency depreciation, especially in emerging markets, inevitably increase the fear of "contagion," whereby many of these currencies get afflicted by similar investor concerns. Among the most notable was the Asian crisis of 1997 that triggered the collapse of the Thai baht and caused a sharp devaluation in most Southeast Asian currencies.

Today, an example of that would be the Turkish lira. The currency has lost more than 40% of its value against the USD since early 2021. A combination of factors led to the depreciation. First, investors grew fearful that Turkish companies wouldn't be able to pay back loans denominated in dollars and euros as the lira continued to fall in value. Secondly, President Trump approved the doubling of steel and aluminum tariffs imposed on Turkey.

Then Turkey’s president, Recep Tayyip Erdogan, did not allow Turkey's central bank to raise interest rates.  And the country didn't have enough U.S. dollars to defend its currency. Turkey's central bank lifted interest rates in September 2018 from 17.75% to 24% to stabilize its currency and curb inflation. But Erdogan believes high interest rates are against the teachings of Islam!

For Malaysia, it is the decline against the Singapore dollar that “drops” our face.

We were on par up to 1980. Beyond that we have gone “south”. Why? The rot from a so-called “nationalist” PM set in! Currency weakness is a symptom of a larger disease. If the disease is not treated, the rot cannot be stopped.

The ringgit is also vulnerable to a slowdown in global growth prospects, especially in the world's largest economies — the US, China and the Eurozone.

Then there are hawkish statements by the U.S. Federal Reserve and others on interest rates. The Fed is set to raise its Fed Funds rate to 2.25% by end 2022. So, expectations of interest rate differentials could play a part in exchange rate movements. In turn, a declining rate will raise imported inflation, especially if food imports alone exceed RM60 billion a year. Some say a 1% variance of the ringgit to the USD will result in a 0.337% variance in CPI.

So, what can we do? BNM must raise OPR now not act after the event. That will stem outflow. Then look at supply bottlenecks. A whole set of structured reforms are also required – from removal of APs to integrity and good governance to political changes that could put Malaysia on the right path (i.e. a pre-1980 scenario)!

AmBank group chief economist recently said that strong commodity prices have kept the ringgit from sliding too much. Being sensitive to the oil price movement, the strong upside to Brent oil price has provided some buffer to the ringgit from slipping too much. Stability to ringgit is more likely to be seen once we start to factor BNM normalisation of its policy rate, health of the economic fundamentals, besides the economic and inflation outlook. 

But it is time to act and to act now, growth is already muted. So why not raise OPR?  The issue is really one of stabilisation/improvement in exchange rate or the pursuit of an “illusive” growth projection.

References:

Currency Depreciation, Tim Smith, Investopedia

“Water face drop” as ringgit depreciates to record low against Sing dollar, Cheah Chor Sooi, Focus Malaysia, 26 April 2022

Singapore dollar hits record high against ringgit at 3.1665, Syafiqah Salim TheEdgeMarkets.com, 25 April 2022

Why is the Turkish lira crashing and what impact is the currency crisis having in Turkey? Associated Press, 4 December 2022

SGD MYR historical exchange rate, Currency converter (https://www.currency-converter.org.uk)