Anwar's RM1 = USD1

Posted: 03 Mar 2014 10:27 PM PST

I don't know how many Malaysians, especially voters in Kajang were deceived by Anwar Ibrahim's promise to equate RM1 to USD1 if he wins Kajang by-election on March 23. Are they so easy to gullible?

The Opposition Leader's promise supersedes the era when he was Deputy Prime Minister and Finance Minister during Asian economic downturn in 1997, which poses this big question - why didn't he do it at that time and save the ringgit value from being pegged at RM3.80 to a dollar?

Then comes the answer - he was never and economist, neither was he a banker nor a trader to understand the impacts of stronger and weaker ringgit on the Malaysian economy. Yes, he understood some while most of it came from his advisers and few friends, including business/economic editors from the mainstream media.

You may ask A Kadir Jasin who blogs The Scribe about it and you will understand why he lambasted Anwar for making such a promise in Kajang.

Alliance Research expects a stronger exchange rate of RM3.30 per US dollar by year-end, supported by stronger fundamentals, including higher gross domestic product growth of 5.0 per cent and overnight policy rate of 3.25 per cent.

There would be a reversal in capital inflow into emerging markets, including Malaysia, and improved trade flows following a recovery in export demand, the research house said in a note yesterday.

However, Alliance Research forecasts the ringgit to weaken further to as low as RM3.40 per US dollar over the next three months before stabilising by the third quarter amid short-term volatility in emerging markets.

Even when we attain the fully-develop status in the year 2020, the RM-USD exchange is not expected to change much unless the USD is under-value or under-subscribed on the international market. However, it is quite unlikely.

There was rising speculation during Tun Abdullah Ahmad Badawi's era as PM that the government would be compelled to review the ringgit peg of RM3.80 to USDI given the persistent weakness of the US dollar in 2006-2007. The ringgit was estimated to be undervalued by 5 per cent to 10 per cent.

Implications of a strong ringgit

Economic Growth
  • Expansionary effect
  • Mild contractionary effect
  • Lower cost of imported input
  • Lower cost of working capital (due to the present low interest rates)
  • Reduced trade surplus (initial impact) due to exchange rate valuation effect, assuming volume remains constant.
Aggregate Supply
  • Lower the cost of production
  • Lower the price of service inputs
  • Lower the price of intermediate inputs
  • Positive for domestic-oriented industries with high import content such as the transport equipment industry and the construction sector, due to lower cost of building materials.
  • In the commodity sector, palm oil and saw logs would receive lower export receipts in ringgit terms due to exchange rate valuation loss as their prices are quoted in the US dollar. The direct impact on export volume is negligible as production is price inelastic, constrained more by yield and cultivated acreage than prices.
  • In the mining sector, exporters of crude oil and liquefied natural gas (LNG) also suffer a loss in export earnings in ringgit terms as prices for these commodities are quoted in the US dollar.
  • In the manufacturing sector, the highly export-oriented non-resource base industries and resource-based industries with high exports would suffer the strong ringgit in terms of lower export receipts from exchange rate valuation loss. Domestic-oriented industries with high import content would gain in terms of lower imported costs given the negative export retention per ringgit of output for these industries.
  • In the services sector, the lower costs of imported inputs and services would result in higher sales and profit margins. Some utilities and transportation companies with large external debt exposure would benefit in terms of foreign exchange gains.
Aggregate Demand
  • Higher consumption
  • Raise real purchasing power
  • Lower external debt
  • Lower imported inflation
  • Cheaper costs of imported capital goods and intermediate goods
  • Improved disposable income to spend. Cheaper imported goods. Imports of consumption goods account for 6.2% of total imports.
  • Positive for investment.
External Trade Balance
  • Lower export valuation gains
  • Lower imported costs
  • Real export competitiveness may not be eroded as long as domestic costs are kept low and productivity continues to grow. Adjustments will take place due to currency changes. It is a one-off valuation effect.
  • A simple quantitative analysis shows that every 1% appreciation of the ringgit will yield 0.14% decline in export value and 0.12% decline in import value during the period 1984 to 2009. Prior to the pegged exchange rate regime, for every 1% appreciation of the ringgit, exports would increase by 0.9% and imports by 0.1%.
  • About 70% of Malaysian exports are being settled in the US dollar vis-a-vis 65% for imports, hence providing a net valuation gain (albeit smaller) for the trade balance as long as exports exceed imports by a bigger margin.
  • Trade surplus should remain as the structure of imports is skewed towards imports of intermediate goods, which would translate into higher production and exports.
Capital Flows
  • Enhanced investors' perception due to strong economic fundamentals
  • Strong ringgit will encourage FDIs
  • Positive for private investment growth. The stronger ringgit will result in lower operational costs given the cheaper cost of imported inputs and lower cost of working capital.
  • Induce the flow of portfolio investments, driven by brighter economic growth prospects as well as improving corporate earnings growth.
External Debt
  • Lower external debt in RM terms due to valuation effects
  • Composition of debt matters
  • Lower cost of servicing external debt stock. The currency composition of total national debt as at end-2008: US (77%); Japanese (15%) and others (8%).
Domestic Prices
  • Valuation effect from imports improves the competitiveness of exports
  • Lower imported prices help to keep domestic price inflation in check.
  • Low inflation provides the flexibility to keep domestic interest rates at reasonable levels to support economic growth.
Balance of payments
  • Current account
  • Capital account
  • The current account remains firmly in surplus as exports are expected to outpace imports. The services deficit is expected to improve due to lower imported inputs.
  • Encourage the inflow of FDIs.

While we do not subscribe to the view of an imminent revaluation of the ringgit peg, it is worth analysing the impact of a strong ringgit on the economy, should there be a re-peg.

Since the adoption of a pegged ringgit regime, the Malaysian economy has emerged stronger and more resilient when compared with its position in the aftermath of the 1997/98 financial crisis. The economy is in a position of strength to support the ringgit. The basic fundamentals are already in place to sustain the current pace of recovery.

These include a record high of foreign exchange reserves, 13 consecutive years of strong current account surpluses since 1998, strengthened banking system, manageable total external debt levels and low inflation.

The competitive benefit from an exchange rate is transitory, and the competitiveness can only be obtained by increasing efficiency and enhancing productivity growth, rather than relying on a weak currency. An adjustment in nominal exchange rate to a stronger level, if accompanied by lower cost of production and productivity growth, should lead to a stronger external sector.

In broad terms, an appreciation of the ringgit is expected to yield expansionary effects on economic growth given the lower cost of production (benefiting from lower prices of imported inputs), as well as lower cost of working capital (due to present low interest rate environment).

Domestic market-oriented industries, such as the transport equipment industry and construction sector, would benefit from the lower cost of imported inputs as when as lower cost of building materials.

The commodity, mining and manufacturing sectors would suffer exchange rate valuation losses in ringgit terms given that the bulk of trade settlements are in the US dollar or the prices are quoted in the US dollar. Note that the valuation impact is a one-off adjustment and should normalise thereafter.

Concerns over a strong currency on export competitiveness are mitigated by lower domestic cost of production due to cheaper imported inputs and services. Real export competitiveness would not be eroded as long as domestic costs are kept low and productivity continues to grow.

A strong currency may force companies to restructure their operation,s to become efficient and lower unit cost of output, adopt higher technology production techniques as welt as move up the products value chain to gain greater competitiveness, rather than depend on a weak currency to enhance competitiveness.

As long as Malaysian products stay competitive, and are complemented by aggressive penetration of newer markets, this would help to sustain export growth momentum.

A strong ringgit, backed by sound economic fundamentals and conducive business environment should facilitate the inflow of FDIs. Operational costs will be lower given the cheaper cost of imported inputs and lower overall cost of working capital. Investors' confidence in the economy would be enhanced, as a strong ringgit is a reflection of the underlying strength of the economy.

On the external debt, the valuation effect would lower the total stock of external debt and the debt -servicing costs. A manageable external debt position is one of the key indicators which credit ratings agencies would consider when reviewing the country's sovereign debt rating.

On the impact on domestic inflation, low imported prices (due to a strong ringgit) would help to keep domestic prices in check. The low inflationary environment provides greater flexibility to keep interest rates low and stable, supporting economic growth.

The 1997-98 economic downturn had grave impact on the world economy, notably in Southeast Asia when Thailand revalued the baht as its drastic move to save its economy from bursting. It sent economic chaos to the whole region which forces all countries, including Malaysia to re-peg the currencies.

A RM1=USD1 will pose other problems. Apart from making our export products  more expensive on the world and regional markets, manufacturers, exporters and importers will need to triple their expenses while our products will make way to the much cheaper makes from other countries.

For them, trading with Malaysia will be very, very costly.

It will also impose direct problems. The labor cost will go up, some investors will have to shift to countries that offer cheaper labor and raw materials. On the public sector, the surge in cost of living will demand for the government to revise their salary by three-folds.

So, how is Anwar going to face all these? He can't - of course - do it if he is the Mentri Besar of Selangor. He must become a prime minister first but even so, he needs the nods from top economists, Bank Negara, other bankers, manufacturers, importers, exporters and the workforce?

It's very impossible. We are opposing a one-way street!

Be fair to Zahid!

Posted: 03 Mar 2014 04:24 AM PST

More pro-BN social media players are sharpening their knives on Home Minister Ahmad Zahid Hamidi for 'being chummy' with Malaysiakini, the anti-government news portal he once lambasted as 'racist and full of lies'.

Had our fellow bloggers here, here and here (there are more) done a bit of fact findings, they wouldn't have threw punches at the minister who was made a 'victim of circumstances' by some irresolute people.

I don't blame my fellow bloggers for expressing their disgust at the event, and the frustration that the minister they have been supporting is now a 'cakap tak serupa bikin'. I respect their opinion but I hope they dig more into the deep to unveil the actual story.

The award-winning presentation organised by Malaysian Social Media Chambers on Feb 26 was a pit by the Mkini and the opposition, so well-organised that it blinded the invites to the Home Minister, Ministry of Communications and Multimedia and the Malaysian Communications and Multimedia Commission.

I made two postings about the event, The handshake that draws criticism and Falling into Malaysiakini's trap a few days ago to help clear the air and give some insights to BN and Umno social media players about the whole affair. Some read it, some didn't.

Zahid, I believe was caught off guard. He attended the function not as a Home Minister but a member of the National Media Consultative Council set up between Ministry of Information, Communications and Culture (under Rais Yatim) and Home Ministry (under Hishammuddin Tun Hussein).

He also attended it for Ahmad Shabery Cheek who was away, in Spain. Furthermore, one of the award winners was Polis Diraja Malaysia (PDRM) which comes under the Home Ministry's purview. And that explains!

Being a strong supporter of social media, he attended the event to browse with key social media without knowing (or being informed in advance) that Mkini was high on the award-recipient list. Had he got the info much earlier, he wouldn't be there!

But he is a true professional. Since the Information DG and reps from the MCMC were also there, he obliged to the request to give away the prizes. Although shocked to find out Mkini was among the big winners', he did not want to dissapoint anybody.

He is the minister for all, not only for pro-BN supporters. Yes, he did utter 'truce' with Steven Gan but that was only to answer the Mkini's boss artfully hint towards him. Zahid's stand on Mkini stays, that the news portal is still not in his good book.

Another camouflaging factor that cheated the authorities was the Chambers key persons - president Shahul Hameed Shaik Dawood and (to my surprise) Abdilillah Ishak, Pemuda Umno's Exco for Media - who is no match to PKR's Rafizi Ramli!

Abdilillah has been high on pro-Umno and pro-BN bloggers' 'wanted list' for his low mileage on social media. He once snubbed at bloggers, accusing them of not contributing to Umno and BN when he himself seldom writes on his own blogs.

The Malaysian Social Media Chambers too will come up with a press statement (hopefully today) to explain the 'brouhaha' pertaining to the event, which includes questions as to why key bloggers were not informed about it, the motive of the event, its affiliations, etc.

I feel sorry for Ahmad Shabery, DG Hj Ibrahim and MCMC for 'busting' them a few days ago over the blunders that took place at the event. However, Shabery's ministry and the MCMC - being the ones with solid supervision on social media - have to be more careful as to avoid unnecessary and uneasy repercussions.

However, matters need to be explained. Not easy to clear the air but we need to make our friends understand the whole story from A to Z. Zahid is not to be blamed - for attending and neither for giving away the prizes to Mkini.

I believe some people at the Malaysian Social Media Chambers are good friends of Mkini bosses and may have a bad agenda to make BN looks like a fool!

Zahid is still firm with his standpoint about Mkini and other pro-opposition news portals and social media. No discount about it!

FOOTNOTE: Some may accuse me of being under Zahid's payroll. Sorry guys, you are wrong! Never got a single sen from any of them, not even Umno for all the support. I'm doing it for myself. So, stop it!


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