The weakening ringgit and the great inflation

 

Malaysia’s exports make up to 20 percent of the country’s gross domestic product (GDP). These are Malaysian exports to the rest of the world.

It may seem healthy and large, but it is not when compared to the likes of South Korea and Japan. Both countries’ GDP export exposure to China alone is up to 25-30 percent each year, when free from any geopolitical constraints such as South Korea’s handling of the “comfort women” issue, which in the view of Japan, has been legally and financially resolved; whereas in the case of Japan, it does not mollycoddle Taiwan, led by the Democratic Progressive Party (DPP) more than it already does.

Be that as it may, the intraregional trade of China, Japan and South Korea on most occasions can and has exceeded 80 percent for the last twenty years, come rain or rain.

Malaysia is located in the hub of Southeast Asia. All foreign direct investment (FDI) from abroad tends to enter via Singapore first. In fact, up to 50 percent of the FDI into Asean are parked at Singapore before they are farmed out to the rest of the region. Has anyone seen the Singapore dollar weakening since August 1965, the year that it was expelled from the Federation of Malaysia?

The answer is a clear “No”. That is because since the 1980s, under the leadership of the late, then prime minister Lee Kuan Yew, who grew up as a Peranakan, adjusted Singapore into an international trading outpost of the region.

Added value

For lack of a better word, Singapore has pivoted itself away from being what the late Yoshihara Kunio at Kyoto University, called “Ersatz Capitalism”, which is a capitalist model of production without any added value.

Singapore, be it under Lee senior, his successor Goh Chok Tok, and Prime Minister Lee Hsien Loong, has through three generations of leaders decided to move away from being a manufacturing centre but a service economy that is focused on regional banking, being a financial centre, and the fount of international intellectual property.

Singapore’s financial district

Indeed, one that is not averse to having a stronger currency. This has in turn allowed the Singapore dollar to remain just as competitive with a basket of Australian, Canadian, European, and Japanese currencies, not excluding the Chinese renminbi.

Regardless of whether the renminbi will displace the US dollar as the preferred international currency of trade, as the renminbi is now used in 4 percent of global trade, although this figure could rise to 7 percent by 2023 or 2024 if China does not suffer from a serious recession that is derivative from a strict Covid-19 protocol of “Dynamic Zero”, Singapore is well placed to handle the global fluctuation in the world economy.

The threat of contracting its GDP by up to 15 percent as projected by the Singapore Monetary Authority in 2020 and 2021 due to the need to prevent a severe outbreak of Covid-19 is no longer a serious systemic threat, especially granted the fact that Singapore’s US$320 billion GDP is exposed to the international trade by more than 350 percent.

No systemic plan

The GDP portion of the Malaysian economy is almost similar to that of Singapore’s, with the same degree of exposure to global trade. However, t Malaysia does not have any systematic plan to transform its ringgit into a pillar of strength. This is both an unfortunate and a strategically flawed approach.

Without a strong ringgit, coupled with a food import that goes up to 60 percent, Malaysia is most vulnerable to importing the inflation of the world. More importantly, some 7 million foreign immigrants are estimated to work in the formal and informal economy of Malaysia.

With a national economic template that is geared towards an affirmative action policy focussing on one majority race, the other races in the country is may be left behind, creating pockets of underdevelopment all over the country.

Sabah is a resource-rich state in Malaysia, yet it is also the poorest of the thirteen states. Ipoh, Perak used to be the second-richest state in Malaysia during the heydays of tin and rubber, when Malaysia was the key exporter in the world, but Perak is now the second-poorest state in Malaysia.

Children crossing the river to go to school near Kampung Nangkawangan, Nabawan, Pensiangan, Sabah

Obviously, the political economy and market-based policies of Malaysia have gone drastically wrong for at least two decades.

The very fact that the people are constantly urging for anything but Umno (ABU) is a sign that even with the handouts of 1MDB theft, the Malaysian economy cannot make do with the old trajectory. Indeed, despite claiming that Umno is back, in three state elections in the last two years, the percentage of Umno and BN voters has not gone up at all.

In a one-to-one contest between Pakatan Harapan and BN, BN would be defeated. The 7 million new voters would not know about Harapan’s struggle, but they wouldn’t know about BN’s either. The political big wigs of the latter have also become corporate and government big wigs.

Learn from Indonesia

With Prime Minister Ismail Sabri Yaakob likely to drag the general election to the middle of next year when the global economy will likely worsen as the Russia-Ukraine war would last that long, the Malaysian economy looks likely to be in a serious pickle.

In this sense, no one should count Harapan out, let alone opposition leader Anwar Ibrahim. History has shown that when all odds are down, he is the kind of leader who has the political savvy to hit back, with the proviso that other coalition leaders know how to follow his lead by entering an ego-free zone.

As things are, the economic picture of Malaysia, both currently and in the future, does not look pretty to say the least. At 60 percent of import, the food import cost is about a whopping RM60 billion.

Be it vegetables, fertilisers, or even locally produced food, the prices are all heading upward. A mere fried chicken wing was barely RM3 per piece sold on the roadside last week. It is now 10 sen shy of RM4; though it can be RM3.80 or RM3.70 if the hawkers have no choice but to bite the bullet by selling it cheaper than their fellow competitors to increase their daily yield.

A price war between B40 and B60 is a race to the bottom. Indeed, as of May 19, the ringgit weakened further to open lower at RM4.4 against the US dollar, the lowest since March 2020 following a hawkish stance by the US Federal Reserve to tighten its monetary policy.

To be sure, there is every sign that the Federal Reserve will continue to increase its interest rate to fight back inflation in the US, which stands at 8.3 percent, the worst in 40 years.

As Anwar correctly thundered recently: “What is Putrajaya’s plan in going forward?” Silence is not elegant anymore when a serious economic maelstrom is facing the country. Even Indonesia momentarily banned palm oil exports in order to reduce the price of their edible vegetable oils, at a time when palm oil is more than US$6,653 per tonne. The cost to the Indonesian government’s coffers? US$3 billion a month.

If Jakarta dares to take such a courageous move, Putrajaya must learn from it, otherwise, the value of the ringgit will continue to shrink while the labour put in by Malaysians and migrant workers will not be proportionate to the hard work they put in day in night out. This is a recipe for collective restlessness and unruly behaviour at the micro and macro level, as witnessed in Sri Lanka. - Mkini

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RAIS HUSSIN is the president/CEO of EMIR Research, a think tank focused on strategic policy recommendations based on rigorous research.

The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.