5 October, 2015 by Idris Jala
In this combative climate, it is difficult for even the stubborn optimist to see a silver lining. The ringgit hitting record lows against the US dollar, a volatile stock exchange reacting to hot money flows, and the downward spiral of energy prices are fodder for worries. Throw in the widening trust deficit, and you end up with a heady mix where everyone is a critic and every critic knows best.
At the PEMANDU’s Economic Update 2015, we took on our harshest critics and faced them head-on. We stood in their shoes, identified tough questions, and answered them upfront through two key sessions.
The first, a panel of eminent government figures for inside-out perspectives. For balance, the second session took on an outside-in approach with representatives from three international ratings agencies.
I want to highlight five areas of criticisms in the hope it will clear the air of what has become an obfuscated space of sentiments and facts. Economic fundamentals are being unfairly pummelled as some blame the 1MDB and political funding issues as sole reasons for the currency slide, without taking into serious consideration external developments outside our control.
Depreciation in the ringgit is entirely due to issues surrounding 1MDB and political funding
In a recent exclusive interview, Bank Negara Malaysia Governor Tan Sri Zeti mentioned that 120 currencies have depreciated this year on the back of the strengthening U.S dollar. I presented two charts that showed some currencies which depreciated against the U.S dollar this year and also for the past five years.
Chart 2 below shows that against the U.S. Dollar, the currencies of Japan, India, Indonesia and Russia depreciated more than the ringgit. Indeed, other than Malaysia, these 120 countries do not have 1MDB issues, yet their currencies have depreciated. It is thus, erroneous to conclude the depreciation of the ringgit is entirely due to 1MDB and political funding issues.
The strengthening of US dollar has negatively impacted 120 currencies, even though they don’t have 1MDB/RM2.6 bil issues
Source: Currency – Bloomberg, GDP in Constant Local Currency – Respective Country Statistics Department/Agency
Longer term currency movements
Source: Currency - Bloomberg; GDP in Constant Local Currency – World Bank
Minister in the Prime Minister’s Department in charge of the Economic Planning Unit, Dato’ Sri Abdul Wahid Omar explains the ‘3 plus 1’ factors affecting the currency. First, a reversal of investment from emerging markets to the strengthening US economy; second, as a net exporter of oil and gas, the drastic drop in oil prices has its impact; third, we are feeling the effects of a moderating Chinese economy. It is these three external factors plus the additional negative domestic sentiment triggered by the 1MDB and political financing that led to the current slide.
James McCormack of Fitch Ratings adds in his engagement with American investors, their concerns lie mainly in how markets are able to withstand external pressures. He shared an anecdote where major investors from New York had no idea what he was referring to, when he brought up 1MDB.
Foreign investors are losing confidence and are no longer investing in Malaysia
This claim is false. First, actual investments have reached record highs every year for the past five years since we launched the ETP. Second, planned or pipeline investments also hit record highs each year. From an investment perspective, there is no loss of confidence. Record investments only tell us investors have strong confidence.
The problem is with speculators and traders taking positions on the ringgit and on the Malaysian stock market ("hot money"). To be clear, shifts in stock market value and currency are not classified as "investment" in official definitions of GDP or the economy. Hence, reduction in the value of the ringgit and the stock market do not reduce our investment and GDP figures per se.
Currently, the economy is being held ransom by sentiments. Minister of International Trade and Industry Dato’ Sri Mustapa Mohamed explains, “We are one of the most open and trade-dependent nations in the world. For that reason, we have to be extra careful given the very volatile nature of markets.”
Tok Pa, as we affectionately call him, acknowledges ups and downs are to be expected,
regardless, “…we have investments in the pipeline that MIDA monitors for manufacturing and it has RM20 billion between now and the next few months,” adding, “We had until July about RM50 billion.”
I have consistently said private investment has grown steadily since the launch of the Economic Transformation Programme (ETP) in 2010, reflecting the private sector’s confidence. Realised private investment increased 2.5 times post-ETP (CAGR between 2011 and 2014 at 13.6% versus 5.5% between 2006 and 2010). For the first half of 2015, private investment stood at RM108.5 (Chart 3) billion, contributing 71% of total investment.
Realised private investment has been robust post-ETP
Source: Department of Statistics, 2006-2010 Private Investment in Constant 2005 Prices in RM
Department of Statistics, 2011-2015 Private Investment in Constant 2010 Prices in RM
Rating agencies have lost confidence in Malaysia and that they are contemplating a downgrade for Malaysia
Despite current challenges, all three ratings agencies are confident about Malaysia, having maintained current ratings. They believe that as long as Malaysia continues with its existing economic and financial reforms, it should avoid any downgrade.
Applauding Malaysia’s firm stance and implementation of the GST and rationalisation of subsidies, they agreed any weakening of resolve in pushing for reforms would be a red flag. As long as the Government does not relent to populist pressures to abandon its good economic and financial reforms, there should not be any worry about possible ratings downgrade.
In short, these agencies focus their attention on policies of the Government and their effective implementation. They say our economic and fiscal reform policies are good and we must continue and not get distracted. These good policies are the key factors that weigh heavily in country risk considerations.
Malaysia is experiencing domestic capital flight
Tan Sri Zeti was crystal clear. She categorically asserted Malaysia is not experiencing domestic capital flight. At the peak of the Asian Financial Crisis, despite outflows and attacks on our currency by foreign speculative activity, domestic capital stayed with us.
She says, “…they believed in the policies we were implementing, and that is why we did not have a currency collapse or a depletion in reserves. In this current situation, foreign corporates and GLCs invest abroad as part of the diversification of their investment activity.”
Tok Pa iterates though outflow of capital is a reflection of a mature economy and holds longer-term benefits, he would like to see some balance. Moving forward there should be greater balance in terms of foreign investment as well as income from Malaysian companies abroad, resulting in a healthy boost for the balance of payments.
Malaysia's public debt and fiscal deficit is getting worse and this is the cause of the current malaise
I wish to highlight that fiscal reforms put in place the last five years have helped trim our deficit. Deficit as a percentage of GDP in 2014 was at 3.4% compared with 6.4% in 2009, with public debt at 53.7% (end-June 2015). We are well ensconced within the ‘safe zone’ (Chart 4) which is for countries whose public debt is below 75% of GDP and deficit at 4% or below.
Malaysia is in the fiscal “safe zone”
Note: All figures are as of 2014 except for China (2013)
Source: MoF; BNM; CIA World Factbook; BCG Analysis
We have also steadily reduced our reliance on oil and gas revenue from 40% in 2009 to 29.7% in 2014, shoring up revenue contributions from other sectors of the 12 National Key Economic Areas.
There are two fundamental truths about the economy. Firstly, the global economy goes through cycles of ups and downs and Malaysia is not spared. Secondly, countries that implement economic transformation and fiscal reforms to inject resilience will weather the storm better than others during any economic downturn. Indeed, based on the BCG matrix above, Malaysia enters the "safe zone" as a result of the country’s transformation in the last few years. The current problems will come to pass and Malaysia will ride the wave.
Overall, the no-holds barred conversations during the Economic Update 2015 tells me there are many good people working to keep us on track, ensuring Malaysia continues to be a growth story.