The Greenback and Malaysian economy

This post is written for my column i malaysian Insider, whcih was published today. I will post the revised version here.

Malaysian Insider

From the Greenback to Malaysian Economy

SEPT 4 — The signs are there that the US dollar is making a comeback. The US economy has been sluggish and badly affected by the sub-prime fiasco. However, many economists believe that the effects of a US economic slowdown would not affect the rest of the world as much as before, especially with China being the new growth engine — this is what is called “decoupling” in economic terms.

In actual fact, when the US sneezes, the rest of the world still catches a cold.

Signs are there that Eurozone is slowing down. In Germany, according to one report, industrial orders dropped almost 3 per cent in June this year; and Germany accounts for a third of Eurozone’s output.

In the UK, the economy is slow and at best sluggish. The latest IMF forecast revises the growth rate to 1.1 per cent from an earlier forecast of 1.7 per cent in 2009.

New Zealand is also facing the prospect of consecutive quarters of negative growth, pushing it into official recession. In Australia, consumer spending is sluggish, and the central bank cut interest rates on Sept 2 by 0.25 percentage point to 7 per cent, making it the first cut in interest rates in seven years.

What this means is that with the slowing down of the US economy, the rest of the industrial world, including the UK and Eurozone, is on the brink of a recession.

If the rest of the world is in recession, demand for goods manufactured in China will decrease. Inventory in China will inevitably build up and China will be facing a slower growth too.

In order to stimulate growth, the UK and Eurozone, like Australia, may have to lower interest rates. This will lead to a scenario where the interest differentials between US and the rest of the industrial world will narrow, making US dollars more attractive again.

That is why the US dollar has been strengthening against the euro and the pound sterling the past few weeks, and this trend will most likely continue.

On the other hand, with the slowing of the world economy, demand for commodities and crude oil will likely fall, making crude oil and commodities cheaper.

What has this got to do with Malaysia?

Well, chances are the US dollar will most likely strengthen against the ringgit too. As a result, it is likely that imported goods, most of them denominated in US dollars, will be more expensive, making our inflation worse.

While crude oil prices may come down, Malaysia, being a net exporter of oil, would not benefit much, as our revenue will decrease with the decline in crude oil prices. A decrease in commodity prices would also have an impact on our economy, and revenue from this would likely decrease.

So, brace yourself for a lower ringgit. Without wanting to sound cynical, it is a fact that Malaysians are used to seeing our currency drop lower and lower — the classic case is the ringgit versus the Singapore dollar, we have been on a straight-line decline since the Seventies — and if we are not careful, we may see our currency dropping further.

What props up a currency has a lot to do with the economic health of a country.

The recent unveiling of Budget 2009 reveals certain worrying trends that we are facing. Our operating expenditure for 2009 will be RM154.2 billion while a comparatively lower amount of RM53.7 billion is earmarked for development.

The operating budget is too huge and increasing at too fast a rate for comfort. From just about RM80 billion in 2004, it has almost doubled in just four years. If this trend is not checked, we will soon run out of money to develop our country.

The increase in spending results in a deficit budget. A deficit budget for a short period is acceptable to help jumpstart the economy. But for Malaysia, we have had a deficit budget for 13 years in a row now, which is too long a period for comfort. In layman’s terms, we are in fact spending borrowed money and living beyond our means. We would only be passing the burden to our children, who would be the one servicing the repayment in later years.

What is needed urgently is to stress efficiency and productivity in the civil service, cut down on unnecessary wastage in running the government, and tackle corruption and abuses in the administration.

Otherwise, in the near future, when our oil runs out, we will not only be having a worthless currency but would also be staring at poverty and possibly bankruptcy. And that day may come sooner than we all realise.

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30 Comments (+add yours?)

  1. Justin Choo
    Sep 03, 2008 @ 15:26:32

    Looks like keeping cash is not a good idea.

    Like

  2. suchfun
    Sep 03, 2008 @ 16:15:00

    so what to do? change all yr money to USD ? or SGD? but believe stupid speculators is the biggest factor rather than genuine economic factors !

    Like

  3. monsterball
    Sep 03, 2008 @ 16:24:30

    Thousand have no choice..put extra cash in fixed deposit….to earn the extra interest.
    Whatever will be will be.
    I recalled our RM was at par with Indon….15 years ago..meaning one million rupiahs ..equal RM1000.
    That was the time hundreds of businesses …close shop…..with banks recalling all loans.
    And who cause it?
    Mahathir ofcourse…quarreling with Tunku Razaleigh…creating so much tensions…and foreign banks simply got sick of the situation and recall all loans.
    Up to now…..Mahathir never regretted…as most are Malaysian Chinese….suffering.
    So you see…..not only UMNO ministers and members are racialists.
    They have revealed their true colour…by one calling others as squatters….saying they own the land….hoping all Malays agrees with them…..champion of the Malay race.
    UMNO have propagate race and religion politics….under TDM…..more than any other PM.
    TDM is real evil.

    Like

  4. A true Malaysian
    Sep 03, 2008 @ 16:37:07

    Very scary indeed when think about all these. Malaysia really need quality people with intelligent, integrity, honesty and with dedication to run the government. A leader with ‘great vision’ still not good enough.

    There is no other option left but to go back to meritocracy, nothing else but meritocracy.

    What is the use of you guys shouting ketuanan here and there, but in the end, found the country’s coffer getting lesser and lesser.

    Like

  5. A true Malaysian
    Sep 03, 2008 @ 18:13:06

    Hello guys,

    Is this article by our blog friend ‘Anak Malaysia’?

    Please read ‘I am a Malaysian’ here,

    http://malaysiakini.com/letters/89003

    Like

  6. folo4
    Sep 03, 2008 @ 19:03:39

    How bad will ringgit sink?

    0.25 USD?

    Like

  7. monsterball
    Sep 03, 2008 @ 19:42:11

    Maybe 0.10 USD?……..HAHAHAHAHAHAHA

    Like

  8. monsterball
    Sep 03, 2008 @ 19:59:08

    True Malaysian..
    With all those qualification…more than enough…PROVIDED… .it is not Mahathir… whom obviously have all those…..plus being an excellent con man.
    Now Anwar has it…Lim Kit Siang will forbid anyone being corrupted in their government.
    So don’t be scared.
    Be prepared to die for your country…coming soon ..or not at all.
    Scary??…….hahahahahahaha
    You only live once..why so be scared.
    And many thousands lives are more important than yours and mine…………yet they think of the country..not for themselves..not scared….at all…….like Justin reading now….scared stiff….fingers numb…cannot comment……..hahahahahaha
    And romerz…cool as a cucumber…judging situation..will take first flight out..with parents to cooler place to rest and let all idiots fight it out.
    Money sure can do wonders.
    You and I and Justin better stay calm.
    Justin can pray for all of us….and Doc can play the piano….to chase all ghosts away.

    Like

  9. A true Malaysian
    Sep 03, 2008 @ 20:38:32

    monsterball,

    For you of course not scare lah. You have got we don’t have and have enjoyed every bit of your life.

    Like

  10. romerz
    Sep 03, 2008 @ 22:28:25

    monsterball,

    Maybe I shouldn’t have told you so much in our last meeting since you misunderstood me.

    I told you I encouraged my siblings to consider their childrens’ future overseas but I also told you I chose to stay and try to do my part for our country.

    My position since we met have not changed so how did you come to the conclusion that I will take the 1st flight out?

    I hope you were joking.

    Like

  11. nick
    Sep 03, 2008 @ 22:33:01

    Dr. Hsu, you are really multi-talented. One minute dispensing medic advice, next playing the piano and now writing on a subject closer to my heart; viz., money. No wonder this blog is growing in popularity. What is happening in the currency market is catching out even the experts. There are winners and losers. For example, global exporters like my Company stands to gain a great deal when the Ringgit weakens. Bad news however when Malaysians travel abroad. Bad news for Air Asia and TM because they have loaded up on USD loans. I agree with you that our Nation’s Balance Sheet looks sick. On a scale of 1 to 10 (strong), I will place Malaysia on 4, definitely a sick patient. Not yet an ICU case but another year of BN rule, we will need to get the coffin ready. Our Finance Minister has been reckless to say the least. We are spending willy nilly and bloating the civil service. In the meantime, from investors point-of-view, the Budget 2009 offered nothing. Yep, NOTHING. With no new investments, we can kiss goodbye to new job creation. Without avenues for our young people, you can guarantee our brightest and smartest will continue to look to our neighbors. Singapore IR (integrated resorts) projects are coming on line by 2009 and 2010. Lots of jobs there. The last I heard, 10,000 new jobs. In Malaysia nothing. LGE mentioned that a large Korean MNC have chosen to locate their new factory eleswhere. He meant Samsung and they have picked Clark in Philippines. Our MITI people were all sleeping.

    Like

  12. monsterball
    Sep 03, 2008 @ 23:43:03

    You miss understood my meaning romerz.
    It was not implying you are a coward or not a patriot.
    It really means….money can do wonders.
    True Malaysian….scary means..too yiung o die?……….hahahahahaha
    Are you also saying….what I am doing or saying.is I an just right age to die?….hahahahahaa
    ok ok.guys…I am just joking.
    Justin is so confused..already vomiting……hahahahahaha

    Like

  13. monsterball
    Sep 03, 2008 @ 23:49:30

    hi folo4….If our money is equal to 0.25 for US 1….thousands in Langkawai ..will be fighting ……just to get japun roti….and maybe some will be digging certain person’s grave and spit…and shit on the bones.
    You think that will happen?

    Like

  14. folo4
    Sep 04, 2008 @ 00:29:30

    It’s a real possibility.

    But now, Malaysia and its citizens are trying not to let that happen, as witnessed in the 12th GE and Anwar’s return.

    Only time will tell, whether our leaders would buckle up and actually lead the country.

    You do believe that Malaysia have the potential to rise above World Rankings, right?

    The question is, will Malaysia still retain that sentiment by the time our leaders straighten up their priorities?

    Like

  15. monsterball
    Sep 04, 2008 @ 03:13:58

    folo4…Do you like”Mission Impossible” movies?

    Like

  16. monsterball
    Sep 04, 2008 @ 03:16:19

    How about….’The killing fields:??

    Like

  17. monsterball
    Sep 04, 2008 @ 03:24:51

    I like….”Come September”
    Have you seen this movie?
    I just enjoy these movies……never imagine it could be real.
    But some childish idiots may get nightmares …after seeing them…thinking they are real.
    I used to take my father’s long towel….tie at my neck….thinking I was Superman!
    I was 6 years old……..yet some adults…more than 20 years old..still behave like A 6 years old kid.
    Do you know any?
    I know ONE!

    Like

  18. monsterball
    Sep 04, 2008 @ 07:25:01

    Good morning to ALL!!
    What a glorious morning……reading good news from Malaysiakini..that Anwar has all the numbers to announce on 16th Sept..
    A bluff.cannot be on and on and on.
    And no reasons for Anwar to bluff…riding high and mighty….right now.
    ACA…..seems to step up….catching corrupted crooks.
    Yes..Malaysia is heading towards a UNITED MALAYSIA FOR MALAYSIANS.

    Like

  19. Dr Hsu
    Sep 04, 2008 @ 10:04:38

    nick, I have been posting on economic matters the past few days because the budget really worries me.

    Like you have mentioned, there is no real push for investment, with only about 25% budget spend on development expenses. FDI is slowing, and as you have rightly pointed out, even Samsung is relocating.

    There is also little incentive for the private sector to invest more. If i am a businessman, I will probably invest overseas, looking at how the overall management of the country is.

    The economy has been in the area of 5-6%, but a lot is due to the good commodity prices. How long can the prices hold when the whole world is slowig down?

    The government has to open up the economy, make it a level playing field. Lift the restrictions under NEP, ad private sector may want to invest some more.

    You are again very right to say that we are not yet an ICU case. malaysia has certain advantages . We have a English speaking workforce (though the English standard is getting lower and lower), we have good infrastructure, we have a good financial system. So it is not too late now to change.

    The cancer is just stage 1. Cut it away and we can still survive. Trim the civil service, increase productivity, weed out corruption, improve on delivery system, bring back a good judiciary system, cut out all the abuses and misuse of public funds by having better transparency and accountability.

    And above all, bring back a fair system and promote true meritocracy.

    We may still be able to play catch up if we do all these.

    Do not, for Malaysia’s sake, play anymore racial politics. Advance the economy and everyone would be able to benefit, irrespective of race.

    Do we have the will to do this????

    Like

  20. monsterball
    Sep 04, 2008 @ 10:14:56

    Come what may…16th September…we are all Malaysians.
    No more chinese…..malays…indians…except from UMNO and BN.
    Those are the lords of the jungle..useless buggers.
    every country have braggarts like them…but Malaysia to the list of all….with their mindsets…so weird and cunning.
    These sheeps will be round up.sooner or later…to be caged for corruptions…and the misled…to be trained… to travel the right path..like what China did 60 years ago. That laid down a strong foundation for unity…and it took China another 25 years…to unite a country with 1.2 billion population.comprising of 56 races.
    So….UMNO members… wake up to UMNO’s sickening rule…and repent.

    Like

  21. yh
    Sep 04, 2008 @ 10:38:16

    dr hsu

    you are mighty right. its scary when the country is running such a huge deficit when oil income is at a record high. i dread to think when commodity prices go south big time. surely, the budget deficit would be at a unsustainable level. unfortunately, this government doesnt bother as it tries to spend its way out of the political quadmire which is their doing anyway.
    the unemployable graduates, bloated civil service, high deficit, wide disparity in income as measured by gini coefficient, are symptoms of flawed fundamentals. its time the government set the fundamentals right. if it doesnt do it, then its time for someone else to do it.

    Like

  22. nick
    Sep 04, 2008 @ 11:15:14

    Dr. Hsu, you seem to have a PhD on economics besides medicine, very wise words. I agree 100%. I can’t say the same about our Cabinet Ministers. Look at AAB. I don’t think he has ever switch on a PC (maybe I am wrong here). But he holds the Finance Minister’s position. It’s like appointing an engineer to be the finance director of a listed company. This will be alright if the engineer has an MBA. But our AAB has no qualifications in things pertaining to economics and finance. To borrow your phrase: “a square peg in a round hole”. Is it because he cannot find even one qualified MP who can be trusted to the keys to the Vault of the Nation? We demand a full-time FM, not a h6 committee person. I hope PR when they assume power will do exactly that. We are living in uncertain times and we do need a strong FM to guide and plan the Nations budget and create wealth.

    Like

  23. Dr Hsu
    Sep 04, 2008 @ 11:31:20

    nick, thanks for your kind words. No , I have no PhD in econmics. But just like piano and IT, I learned it on my own.

    I did a lot of investment and so to have a good basic in economics is important to be able to invest wisely.

    Anyway, economics is about common sense. But many of our leaders , they seem to have lost their common sense after many years of walkig in the power corridor.

    Like

  24. nick
    Sep 04, 2008 @ 11:41:13

    Dr. Hsu, my first intro to 101 Econs was when I started my articleship in accountancy. Talk to a economics guy and he or she will say “on one hand, but then on the other hand”. Yes, all economists are two-handed. They don’t have a fixed position. And you are absolutely spot on to say economics is about common sense: “Spend within your means”. “Save for a rainy day”, etc. I read in one book which says even a parrot can be an economist if it can be taught to utter 2 words: “supply” and “demand”. Ha ha ha.

    Like

  25. A true Malaysian
    Sep 04, 2008 @ 11:57:11

    Even if the cancer is stage 1, the ‘patient’ still cannot take it for granted. Those in BN have to realise this critical condition that we are facing now and do what is right to ensure continue survival of our country.

    The whole economy and system of the country are in a mess now. Those in BN cannot continue to live in denial mode. Do something concrete even you choose not to jump ship to Pakatan Rakyat.

    Like

  26. A true Malaysian
    Sep 04, 2008 @ 12:33:28

    Nick,

    You are right. As I commented before, the post of Finance Minister should go to an qualified economist or accountant, instead of any Tom, Dick & Harry.

    Just imagine a household if continuously or consecutively spending more than what it earns, what will happen to that household?

    A wrong precedence has been set by our country to let PM hold the Finance Minister portfolio. Even if the PM is an qualified economist or accountant, he should not be the Finance Minister at the same time.

    Like

  27. suchfun
    Sep 04, 2008 @ 16:59:27

    Govt budget 2009, spend RM152 billion on 1.2 million civil servants, i.e. RM127,000 each, this sound crazy if compare with the avaerage salary expenditure for Msia companies.

    Like

  28. Anak Malaysia
    Sep 05, 2008 @ 11:29:57

    hahaha…

    now everybody start realizing that definitely, one way or another, “we’ll be rewarded with what we reap”…

    sigh… this time, there is no escaping from it. if it comes, all of us malaysians will suffers!

    so, do we need a dark knight to come to our rescue? certainly not! all of the problems originated from us. It range from voting for the current inefficient and corrupted government into power, for being afraid to vote for an alternate government, for being afraid of any changes, etc. we are responsible for this mess and and we have to clean this mess ourselves. the power to change lies with us…

    i do think that the wind of change is sweeping Malaysia right now. for once, although we do have many differences, whether we realize it or not, we have already started to think and act as Malaysians…

    that’s very much encouraging…

    Like

  29. Anak Malaysia
    Sep 07, 2008 @ 03:04:01

    right after the anouncement of the Budget 2009, the RM has been sliding down against the USD. As per today it hovers at 1USD=3.47RM. I think just two weeks ago it hovers at 1USD=3.2(something)RM.

    Coincidence or a reflection of a very BAD budget?

    Like

  30. jamesloh
    Sep 08, 2008 @ 18:37:26

    the ringgit is expected to hover ard 3,40 to 3.50..but that is digital currency..a quote.on the ground what does that actually mean. a pereption our rm has weakened..not just usd..but against other currencies in the region.
    what would be the options people who have less cash m say 100,000rm? i havent come across middle working class with that liqulidity..many of my friends earlier this yr moved out their funds,,in singapore,,,and they felt safe n its stable.
    last 3 months, usd1.5 billion has move out according to bloomberg report,

    people just dont feel comfortable,,esp today umno youth launched verbal attacks at ngo”s n other..to resort to mass demonstrations..doubt this bn will give way so easily,,n may resort to create chaos ,
    this is not scary….this is one excitement of a lifetime..let await..this..n see these monkeys dance…its party time

    Like

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