Why Can’t Public Enjoy the Benefits of Strong Ringgit?

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Oct 28 2007
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It’s not difficult to become a Finance Minister, especially when you’re also holding the position as the Prime Minister cum Minister of Internal Security. Malaysian Prime Minister (PM) could easily be one of the most powerful positions in the world, holding the other two very important ministerships as he walks the corridor of powers. As the Finance Minister, basically the nation’s coffer is at PM’s mercy and disposal. As the Minister of Internal Security, basically the PM is empowered to arrest and detain anyone without trial for an indefinite period based on mere suspicion that one “may be likely” to commit an act deemed dangerous to national security.

Except for all the local Government-control media, almost all foreign media and local blogs (including FinanceTwitter) have wrote that somehow the snap general election is very near. Of course if you care to read other political blogs, then you won’t be surprise if the dates such as 25th Nov 2007, 15th Dec 2007 and 15th Mar 2008 are mentioned as the possible election date, at least those are the prosperous dates consulted from feng-shui masters by the ruling party – as the claims goes.

Election’s “feel good” factors

Feng shui or not, it’s no brainer that you need “feel good” factors, lots of them, to attract voters to put a cross on the voting paper. It’s not easy to get all the stars aligned. You should know that there’re couple of daily stuffs which will see price hike next year, 2008. Amongst them are the toll-rate, fuel prices, electricity rate and gas prices. No prizes if you can guess what else will be affected. As with the economic equation, the chain reaction could be unstoppable.

The ruling government is a hell lucky government. This doesn’t mean the government is effective in governing the small nation of only 26-million people though. It actually implies that the nation is blessed with too much natural resources, so much so that Singapore senior Lee Kuan Yew’s envy was obvious during an interview recently. The government naturally depends on these natural resources, one way or another, to spring fairy-tales and subsequently feel-good stories.

The stock market closed last Friday to a fresh high to 1,398.55, just an inch from the 1,400 mark, mainly due to gains from palm oil companies. Largely influenced by high crude oil, the prospect of demand for biofuels from palm oil lifted the composite index. The currency ringgit meanwhile strengthened to a 10-year high of 3.3480 against the US dollar.

Finance Minister who talks Myth

So, when the Malaysian PM cum Finance Minister cum Minister of Internal Security said that the strengthening of the ringgit is due to investors’ confidence in the local currency, the expanding economy and strong foreign exchange reserves, you should take that with a pinch of salt and not putting an ounce of trust. Investors or currency speculators are not buying ringgit because they’re confident the ringgit will appreciate due to fundamental reason. They’re buying because the U.S. dollars are weakening. And there’s obvious difference between them.

US Dollar against Ringgit 26 Oct 2007People don’t buy in bulks your instant noodles because its value will greatly appreciate (and hence its price) due to the latest research that found your instant noodles contain newly found Omega-3 which is superior than salmon fish. But people are buying your instant noodles because the other country said their own produced instant noodles contain substance that could cause potential prostate and breast cancer. See the difference?

Now why I equate U.S. dollar to cancerous instant noodle? Because Bernanke had chop off a whopping 50 basis points (0.50 percent) in interest rate and he’s expected to cut more in the coming months. This means the value of U.S. dollar has greatly reduced and will continue to weaken. People don’t buy currency that depreciated by 0.50 percent if there’re better choice elsewhere. If this is not enough to scare you, remember that the Feds Chairman still has 4.75 percent to play around. He can still cut 0.25 percent for 10 more times to bring the rate to 2.25 to tame the likely-recession into submission (example).

USD against Euro CAD Yen PoundAnd when Ben Bernanke continues to cut the rates (assuming he has to due to persistent housing problem and weak U.S. economic growth) what do you think of the U.S. currency? Where do you think the currency investors or speculators will take their money to? These people need to make money with their funds and if even Ghana or Namibia can give the highest interest rate, they won’t blink twice about parking their money there.

So, it’s a myth and definitely not true what the PM told you. Nevertheless you can bet that if U.S. dollar continues to show weakness, more foreign funds might decide to park in the local stock market. I said “might” because Malaysia is not the only choice for these cash-rich funds. There is still Singapore, Indonesia, Thailand or even Vietnam stock markets that are on the race to attract the hot money. In fact every major currency appreciated against the U.S. dollars after “Uncle Ben” cut the rate by 50 basis points to 4.75 percent on 18th Sept 2007, mind you.

Will the public enjoys the benefits of Strong Ringgit?

On the other hand, there’re hidden reasons why the government favors strong ringgit. It will heal some of their headaches, at least temporary until after the election. Both higher crude oil and strong ringgit will greatly reduce the fuel subsidy. Strong ringgit also will make import goods less expensive and in theory imported food and materials’ prices should be lowered. But you won’t see any price reduction in these goods as the chain of governance is simply too messy.
Will strong ringgit produce cheaper goods?And
you keep on wondering why you couldn’t enjoy a bit of the benefits of having stronger ringgit.
Does this piss you off? When was the last time you heard of price reduction in finished goods because the raw materials were cheaper due to stronger ringgit? And you can’t simply believe the inflation rate figure released by the government, can you? If the opposition parties can pull a better result this time, it’s not because the oppositions are doing better but simply because the ruling parties screw-up big time in managing the economy of the country.

I wonder where’s the prepared text used repeatitively that justify weaker ringgit as stronger ringgit will make the nation’s export less competitive. Who says you need a PhD to become a Finance Minister?

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guy cant even pass his stats paper and he talks about currency. and half the time, he is either asleep or having his fiesta overseas. his cabinet is substantially made up of uncouth material. under the circumstances, i rather put my trust in my dog as far as econimics and finance are concerned.

this is really good stuff… i can see a bit how the fed interest rates cut affects the currency valuation.

one thing though… with election coming… certain counters are going to fly… i am going to try to catch the boat.

hello zewt … thanx for the comment … you should be able to notice stock counters within the top 20 being played …

this could be one of the greatest time to make some money off the stocks … after all election only happens nce every 4-5 years …

cheers …

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