Friday, June 15, 2007

Too Shy, Too Modest

Ask any Malaysian on the street about the ringgit and its gains from 3.8 (pegged) to 3.45 to the USD following its floatation - many would think that its good, but at the same time worry silently that maybe foreign investors have been too exuberant. Some may even be thinking that foreign investors are more bullish than local investors for no good reason - but let's keep quiet about it cause FDIs, liquidity driven bull runs cannot be all bad.

We are like kids who have been scared shitless from the 97 implosion which took years to recover. We are so used to the 3.8 peg that we don't know where the true fair value is. We are not certain whether there was sufficient banking reforms since then. Everyone else seem to think we are scoring well, but are we? Most Malaysians suffer currently from the "we are not worthy" mentality.

This is not going to be a Merdeka rah-rah article, and certainly not a Malaysia-Boleh piece of diatribe. Malaysian public support tend to over-rate themselves when compatriots are playing in sports events. However, when it comes to local business and finance, we are the first to step on ourselves. This willingness to be the first to rubbish ourselves is acceptable as it keeps humility within grasp, and we do not get ahead of ourselves. We are never quite certain that we are "good enough", "productive enough", "competitive enough" ... We always think we have a lot of excess baggage in various pockets of our economy, government, bureaucracy, political landscape, transparency, civil service and social infrastrcuture - and to a large extent there is truth there.

However, when it comes to business and finance perceptions, the indicators and factors to consider are actually quite straight-forward. The nuances are reduced: you produce the numbers, people will re-rate you accordingly.

First, we must know why Asia went through the 97 implosion. It was not a solvency issue but a contraction of liquidity. That is important to acknowledge as insolvency would be a really bad thing which permeates through the balance sheet of the respective economies. Thus many Asian nations affected went about taking their medicine and tried to exercise better financial discipline and improve their financial infrastructure to better cope with future "liquidity crisis".

Malaysia has been more successful than most in accumulating reserves, so much so that we are now #12 largest in terms of foreign reserves. For a country as tiny as Malaysia, that is highly significant. Oil/gas and palm oil have provided a generous kicker over the last 5 years, and the pegged undervalued ringgit magnified returns.

Did we improve in other areas? The banking system needed revamp. Malaysia has whittled down the number of banks, made them better capitalised, and enforced stricter lending and recovery methods/rules. Overall, risk management and banking infrastructure have improved. In allowing foreign banks to be involved in the local scene was a critical sign of being more open, and helps to facilitate competition, thus encouraging adoption of more global best-practices.

There are other macro risks and interest rate risks to consider before we get ahead of ourselves. In terms of inflation, Malaysia's CPI has been running at the benign 2%-2.5% for the past 2 years, very admirable and thanks to a stronger ringgit which reduced imported inflation. Another important indicator in the present world of money supply growth is to look at money supply growth vis-a-vis the read gdp growth. If the gap is wide, there is the first sign of trouble and deficiency in the quality of economy recovery. However, the readings for the past 3 years have shown that real gdp growth has kept close to money supply growth in most of Asia with the exception of India, Korea and HK. Next close to the danger levels are Singapore, Indonesia and the Phillippines. These readings would lend itself to predicting inflationary blowout cases. In Asia, if we were to take into account the velocity of money (M2) as well, we can find that countries on the danger list for inflationary blowouts are Indonesia and the Philippines. Followed by india and Thailand. Next would be Singapore and Korea. then its HK. Towards the last quartile are the safe haven economies (strong currency, strong reserves, inflation under control, low gap btw money supply-real-gdp): Taiwan, Malaysia and China.

Updated Foreign Reserves (in millions of USD)

1 People's Republic of China $ 1,202,000 March 2007
Japan $ 911,140 May 2007
Russia $ 406,500 June 2007
Taiwan $ 265,700 May 2007
South Korea $ 250,740 May 2007
India $ 208,373 June 2007
Singapore $ 140,900 May 2007
Hong Kong, China $ 136,200 May 2007
Brazil $ 122,389 May 2007
Germany $ 117,998 April 2007
France $ 102,703 April 2007
Malaysia $ 98,400 May 2007
United Kingdom $ 85,910 April 2007
Italy $ 79,266 April 2007
Algeria $ 77,780 December 2006
Mexico $ 77,576 April 2007
Thailand $ 70,396 May 2007
Turkey $ 69,845 April 2007
Australia $ 69,752 May 2007
United States $ 66,850 April 2007

These are just absolute figures which may not make much sense. You need to compare that as a multiple of months of imports, or divided by the population, or divided by the GDP, or divided by GDP per capita to get a better hold of the reserves. No matter how you look at it, Malaysia comes out smelling like roses. All said, the amount of reserves for Malaysia is extremely healthy, even excessively so. There is a school of thought that you need not accumulate so much reserves as that will mean ineffective utilisation of funds. However, most emerging markets have regarded reserves as a good buffer to protect the currency and to show inherent strength. You cannot stop that mentality following the 97 implosion experience.

Zeti has done very well, and in fact Badawi has done well as well in terms of practising financial restraint, better transparency, more open economy, and giving the proper institutions the needed independence to do their job well.
I don't think the previous guy would have done as well, financial restaint???,.. what financial restraint... non-meddling / independence for important regulatory institutions ... what independence? Does anyone remember how Bank Negara was considered the biggest rogue forex trading central bank in the world by forex traders in the 90s? Hmm, some people involved still in government now actually - so my point is that for many important government institutions, its a far cry from the maddening days of the 90s.
Of course, I am not saying Badawi's reign is perfect, far from it, but its a whole lot better than people are willing to give him credit for. Back to Zeti, she has done exceedingly well. The balance sheet looks very good, financial infra has improved, and now that resrves has reached excessive levels: Bank Negara has loosened capital controls and allowed for appreciation in ringgit to move the economy up the value chain. Most of us are still at pains to even dare to consider positives to the financial and fiscal balance sheet, and themselves not convinced of where the ringgit is or where the stock market is.
Its OK to be slightly proud, its OK, the ringgit won't fall through a hole, its OK, the ringgit will appreciate further from here, its OK, there is sustainability in the Malaysian economy; its OK, the foreign funds are not that flighty and more long term this time around; its OK, local interest rates won't go through the roof; its OK, we won't see CPI breaking our budgets despite the tight labour markets and recent round of increments for goods and services. Its OK to regard the economy as better grounded now. Really, it is. No need to be shy-shy lah.


Ali BAba said...

viva malaysia, mal boleh, when have malaysians become so kiasu & kiasi. maybee too close to spore.
Buy now before too late!Buy the O&G stocks like sapcrest tgt 3!
SCOMI 2! SAAG 10 by next week

John said...

Do you seriously believe that inflation is 2-2.5% in Malaysia?


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