The Seven Hundred Million Dollar Man’s Fate Depends On The Ringgit

Before the currency stop trading for the weekend, the Malaysian Ringgit was trading as high as RM3.9530 to a U.S. dollar. After the closing bell, it settled at RM3.9220 to a buck. So, does this mean RM3.90 is a new support level and the ringgit can never strengthen to RM3.80 anymore, at least for the rest of the year (*grin*)?

Currency trading is awesomely interesting, is it not? It is such a powerful toolthat it can be used to bring down an institution or a government, any government for that matter. Bank of England was brought down by George Soros in 1992 when he bet against the powerful pound. Soros made at least US$1 billion in one single trade.

Of course, then Malaysian Prime Minister Mahathir Mohamad bet against what Soros was betting. In other words, Mahathir, with a country’s treasure at his disposal, bet the British pound would appreciate. The rest is history and Mahathir and his team of gamblers lost an estimated RM30 billion on their forex gambling.

The powerful Russia was no different. What the America needed to do was to bring down the price of crude oil. Oil and gas revenues make up more than 50% of the Russian government’s total revenue. Hence, when the crude oil collapsed, the Ruble tumbles and the Russian economy goes downaccordingly. Sure, Putin survives but he isn’t as arrogant as before.

About 30 million Malaysians are watching the next step of their seven hundred million dollar man – PM Najib Razak. What will his administration do with the collapsing of ringgit? True, there are pros and cons of a weak currency. Najib’s loyal but dumb supporters have already screamed about the benefits of a weak ringgit.

A weaker ringgit increases the competitiveness of a country’s goods. It is supposed to boosts foreign demand. Unfortunately, there’re not much cheap goods that foreigners want which they cannot get in cheap-land China. Cheaper condom, rubber glove, durian – yes. Cheaper Boeing plane, Berkin handbag, iPhone – no.

How about increases in tourism? Yes, it seems this is the only industry that could flourish with a weaker ringgit. Singaporeans are so freaking happy that a dollar could get RM2.83 worth of goods. But the bulk of the tourists – China tourists – are not coming, thanks to Najib administration’s incompetency in handling the MH370 crisis.

However, Malaysia’s main revenue doesn’t come from tourism. Furthermore,tourism can only do so much to a country’s economy. Otherwise Indonesia should have had prosper like Switzerland based on how weak Rupiah is. Likewise, tourism heaven Greece wouldn’t have bankrupted by its debt.

Shouldn’t foreign investment come into Malaysia in droves with a weaker ringgit? Are you kidding me? Bring in millions or billions and risk being forced to give away 30% stake under the pretext of NEP policy? Besides, without any idea how low can ringgit goes, there’s only one way foreign funds can go – out of this country.

While the Government of Malaysia controls the local stock market, especially after the 1997 Asian Financial Crisis, the same cannot be said about its currency. While a weaker ringgit can boost locally made goods, it also makes foreign goods more expensive. Milk powder would be more expensive simply because the country doesn’t produce it.

Health and pharmaceutical products and drugs would be more expensive, not to mention fruits, rice, livestock feed, machineries, spare parts and whatnot. Poultry meat and eggs, import milk, beef, mutton, transportation costs are some examples which would be hit by a weakening ringgit. To rub salt into the wound, the 6% GST value will be higher based on the more expensive import goods.

Forget about holidays to a foreign country because inflation works hand in glove with a weaker currency. Most importantly, a weaker ringgit does not only reduce profit for a company that import goods in U.S. dollar, there could be a prospect that companies could go bust due to over expose in borrowings.

Tons of UMNO related companies went into bankruptcy during the 1997 Asian Financial Crisis because the government ran out of money to bail everyone. And they couldn’t be saved primarily because they had borrowed heavily in U.S. dollar. From RM2.5 to as low as RM4.73 to US$1 dollar during the crisis, their debt had obviously doubled.

Hence, it’s not an exaggerated statement to say that the seven hundred million dollar man Najib Razak’s fate depends on the ringgit. Foreign fund managers also do not want to be trapped in a situation where it’s too late to “exit” the ringgit. The indecisive pink lip Najib will probably drag his feet about a possible re-pegging of ringgit to the U.S. dollar.

If the ringgit continues to weaken, and it will breach RM4.00 to a U.S. dollar sooner than you thought, the peoples’ anger could spill to the street because it has reached a stage where they need someone to be blamed. As expectedly and conveniently, they would put the blame on one single person – the seven hundred million dollar man Najib Razak.

If that was not enough to compound Najib’s problem, currency speculators have started short selling the ringgit in anticipation of making easy money from the present crisis of confidence “plague” infecting Najib’s administration. Is it a coincidence that the 20-year-cycle is happening again to the Malaysia Ringgit, the last being the 1997 Financial Crisis? -financetwitter