Malaysia’s ringgit is set for a further skid after skirting an historic low of RM4.50 versus the US dollar at the start of the New Year.
While there remains strong support at this psychological level, the culmination of stimuli strongly suggests the market will break through the floor in coming months.
No money, no honey
The first and the foremost of which is that the Bank Negara Malaysia (BNM), the Malaysian central bank, doesn’t have the adequate reserves to scare off the 800 pound gorillas that swing around the forex markets.
With reserves of just under US$100 billion, there is a real risk of a double jeopardy where being forced to sit on the sidelines allows market forces a free-hand to sell and short-sell at will; or alternatively that any persistent attempt at intervention will deplete reserves to dangerously low levels – both scenarios thereby sparking off more panic amongst holders of the ringgit Malaysia.
Bank Negara’s stance in the past has been to intervene to support the currency floors, but this is solely restricted to holding the spot price in place, while concurrently sending the forward markets plummeting and rates for hedging the ringgit into overdrive, much to the consternation of not only commercial participants in cross-border trade but also the region’s other central bankers whose currencies are in turn negatively affected by Bank Negara’s intervention.
You got Trumped
Global currency markets got a hit of pure volatility directly into its veins with the shock win of the anti-establishment candidate in America’s presidential elections, this coming on the back of the one-two punch of the Brexit win in Britain.
Stating the obvious, it’s not business as usual these days, folks. Relying solely on historical precedents is a dangerously naïve stance at this point in time.
The speedball topper on this is the spike in short-term interest rates, coupled with expectations of sustained increases during Donald Trump’s first term in office.
Even with stabilised rates, the levels have now been reset, which argues for new dollar trading ranges amongst corresponding global currencies – a trend which is already under way in the Chinese renminbi, British pound and euro.
Countries with relatively high US dollar exposures should be harder hit, Malaysia being a leading candidate with US$3.5 billion in outstanding short-term dollar debt due in 2017 alone, thereby making Malaysian banks amongst the most dependent on dollar funding in South-East Asia.
Hints of Harare
Malaysia is fast sliding down the rankings amongst developed democratic states in terms of political freedoms, human rights, institutional credibility, independent judiciary and authoritarian controls.
All these failings contribute to an erosion of the rule of law, which is without exception the single most important factor for both domestic reinvestment as well as inbound foreign investment.
Despite its constitutional parliamentary democracy, Malaysia is looking more and more like a police state under a power-obsessed dictator, with parallels to Marcos’ Philippines and Suharto’s Indonesia.
In a few short steps it might even be spoken of in the same breath as Zimbabwe under Mugabe – perhaps the best contemporary example of a failed state laboring under the twin beasts of stagnant economic growth and rampant hyperinflation.
Just as the world condemned Mugabe for his authoritarian policies and racist attitudes which have turned both the state and its citizens into pariahs, the parlour talk on Malaysia has turned decidedly ignominious.
And while they haven’t been shown the door just yet, it’s apparent that Malaysian leaders’ continued presence swanking about on the global stage is becoming an increasingly embarrassing social faux pas for their hosts.
The effect on the Zimbabwean dollar is well-documented, and every desperate new measure taken by Harare to prop up its value such as the new ‘bond note’ currency introduced last year is met with derision in the marketplace.
If the Malaysian currency (RM) continues its slide against the dollar, it’s not unthinkable that a dollar peg or other stop-gap means will tip the scales and trigger an outflow of ringgit outside the country, prompting a critical shortage.
The big boys of the institutional financial marketplace are always on the lookout for decent odds on which they can place a sizeable bet. For multi-billion institutions, there is no better gambling den than global currency markets, with comparatively low transaction fees, deep liquidity and multi-product efficiencies.
While it’s not always politically polite to thumb your nose at sovereign states, many have been disarmingly candid about their aggressive short stance on the Ringgit Malaysia.
BNP Paribas Investment Partners, which manages over US$600 billion in assets, has gone on record in the past stating they’re shorting the ringgit Malaysia across the board, as has Pacific Investment Management Co (Pimco), which oversees US$1.52 trillion and it is one of the world’s largest macro funds.
The risk/return trade-off on shorting the ringgit may have diminished with the recent drop in price, but the negative sentiment momentum against the currency remains strong and for bulge-bracket speculators there is safety in numbers, with each fund closely monitoring the activity of its competitors to ensure, amongst other things, that they don’t miss an easy windfall.
Too many pundits make the case against the ringgit Malaysia without citing the elephant in the room, the one that rules the nation with an increasingly heavy hand. Currency speculation is a macro trade, and so it is necessary to acknowledge the source of soured foreign and domestic investor confidence.
Whether or not the current administration can withstand the backlash of angry voters and a revamped and coalescing coalition in the next general election – likely to be called early this year instead of in 2018 – there will be plenty of political uncertainty fuelling a wait-and-see attitude, and any negative turn on sentiment – which seems unavoidable – will further hobble the ringgit Malaysia.
Lastly, but not least, it is also true that a free falling ringgit Malaysia, may be the last remaining catalyst to achieve real political change for the better in Malaysia, despite the inevitable fallout of economic hardship upon her citizenry.
Certainly such a hypothesis is not without historical precedent, the Asian Currency Crisis of the late 1990s having sent other stubbornly longstanding regional strongmen packing; and even nearly toppling Malaysia’s own Goliath of the day, now back in a new avatar as David and for whom the ringgit Malaysia may be his most effective slingshot.
Think and reflect.