Friday, 23 December 2016


Recently the Second Finance Minister Johari Abdul Ghani said that there's no need or cause to panic over the depreciation of Malaysian currency, Ringgit, which I agree completely. [1]

Tony Pua being Tony Pua went berserk over Johari's remark and went on saying that when government's reply to Ringgit plunge is "don't panic", time to panic. [2]

Tony also urged the government to address the "ultimate cause" that has led to Ringgit depreciation, which according to him, is:

Government Should Address Malaysia's Confidence Crisis: The Edge

Tony added that this is the third consecutive year where the Ringgit has become the worst performing currency in Asia:

Before I comment on the issue of "confidence crisis" raised by Tony, allow me to fact-check Tony with regard to his claim that this is the third consecutive year where Ringgit has become the worst performing Asian currency.

Basically Tony said that Ringgit has been the worst perfoming currency in Asia in 2014, 2015 and 2016.

In 2014, Ringgit was not the worst performing currency in Asia, instead it was Japanese Yen.

USDMYR (Blue) vs USDJPY (Purple)

Ringgit depreciated about 6.1% in 2014 against US Dollar, while Yen depreciated more than 13% against US Dollar.

Just to be sure let's check Ringgit movement against Yen in 2014:

Movement of the Ringgit: BNM 2014 Annual Report

In 2014, Ringgit appreciated 6.9% against Yen meaning that Ringgit was not the worst performer among Asian currencies in that particular year.

Last I checked, Japan's still an Asian country, so that's one strike for you Tony.

In 2015, yes, Ringgit is Asia's worst performing currency and it depreciated virtually against all major and regional currencies.

Movement of the Ringgit in 2015: BNM 2015 Annual Report

Ringgit depreciated 18.6% against US Dollar making it the worst performing currency in Asia.

But it's also not a cause for alarm because almost all oil-exporting nation currencies depreciated sharply against US Dollar save for Gulf Cooperation Council (GCC) [3] like Saudi, UAE, Qatar who pegged their currencies to US Dollar and Brunei who had a monetary union [4] with Singapore.

Selected Oil-Exporting Countries Currencies Performance Against USD in 2015
Oil-exporting countries which floated their currencies like Malaysia was affected negatively by the plunge in crude oil prices throughout the 2015.

Russian Rouble depreciated more than 50% against US Dollar in 2015, Brazilian Real, Canadian Dollar, Mexican Peso, Norweign Krone depreciated roughly 20% against US Dollar similar to Ringgit.

Was there a confidence crisis in Canada and Norway that caused their currencies to depreciate against US Dollar at similar magnitude as Ringgit in 2015?

What's there to worry about when other oil-producing and exporting nation currencies depreciated too?

They have no 1CDB in Canada, they have no 1NDB in Norway, they have no 1MexDB in Mexico.

How could you attribute Ringgit's depreciation to confidence crisis due to 1MDB only?

What about this year? Is Ringgit Asia's worst performing currency in 2016? Not quite.

Ringgit (Orange), Peso (Blue), Kyats (Pink), Yuan (Green) Performance Aganst USD in 2016: Bloomberg
In 2016, so far, Ringgit depreciated 3.9% against US Dollar, Philippine Peso depreciated 5.6%, Myanmar Burmese Kyats down 4.8% and Chinese Yuan dropped 7.3% againts US dollar respectively.

Philippines, Myanmar and China are all Asian countries right?

So is Ringgit still the worst performing currency in Asia this year Tony?

No and ultimately, Ringgit is not the worst Asian currency in three consecutive years as claimed by Tony.

Fact-check done but I don't want to stop here because I wanted to address why Ringgit hasn't rebounded against US Dollar since crude oil has rebounded this year.

Brent Crude Oil Price Movement in 2016: Bloomberg

Year-to-date, oil has rebounded 47% and yet at the same period, Ringgit depreciated 4% against US Dollar.

Tony thinks that 1MDB was the cause of why Ringgit hasn't followed oil bounce this year but he conveniently overlooked the fact that there are other factors that bogged down the Ringgit.

Other than oil, Ringgit depreciated against US Dollar because of uncertainties resulted from Federal Reserve's monetary policy stance.

Investors around the globe expected Federal Reserve to hike its interest rate after 7 years of keeping it near 0%:

Effective Federal Funds Rate: St Louis FRED

After ending the Quantitative Easing (QE) program in October 2014, Fed indicated that they were ready to start tightening its monetary policy gradually by hiking the interest rate.

As a result investors exited emerging markets and started buying assets in US reversing capital flows from emerging markets to developed markets.

In the same period US Dollar strengthened against all other currencies in the world:

Trade Weighted US Dollar Index: St Louis FRED

In the first half of 2016, Ringgit appreciated against US Dollar sharply and at one point became the best performing currency in Asia [5]:

Of course Tony overlooked the fact that Ringgit was Asia's best performing currency earlier this year because it's opposition's habit to highlight only the negative things that are happening in our country.

By June this year, Ringgit started to depreciate again and last month Ringgit erased all gains it recorded in the first half of 2016.

This is because of uncertainties arose after Donald Trump stunned the world by beating Hillary Clinton in the US Presidential election to become the next US President.

Apart from the fact that Trump's campaign was based on racism, sexism and the politics of fear, he also promised to spend [6] heavily on US infrastructure via a fiscal stimulus package worth 1 trillion US Dollar.

The financial markets reacted to the planned stimulus differently across the board.

The stock market particularly financial and industrial stocks rose sharply after Trump's victory while the US government bonds (treasury) took a huge hit as investors reacted to the planned $1 trillion fiscal stimulus. (*When prices of bond fall, the bond yields rise):

The 10-year US treasury yield rose (price dropped) the most in three years as bond investors think that President Trump's infrastructure stimulus will stoke inflation in the US.

Trump has also promised to the Americans that he will pull out from any current and already-planned trade deals or agreements between US and other bloc of countries like the NAFTA, TPP and TTIP because he thought that those trade deals have not benefited and will not benefit the Americans.

He's also accused China of practising currency manipulation by competitively devaluing its currency (Chinese Yuan) to make its exports cheaper and gain a competitive advantage over other countries at the expense of the US exports industry.

He planned to impose a huge import tariffs (duty) on products from China that will make them become more expensive and less competitive.

These protectionism policies are expected to boost US inflation rates faster and will give room for US central bank, the Federal Reserve to raise the interest rate.

Since the global financial crisis in 2008, Fed has only hiked the interest rate once in December 2015 by 25bps (+0.25%) because of the persistently low inflation and slack in the job market.

Trump's expansionary fiscal stance and protectionist stance on trade stoke the selloffs in US Treasury as investors expected faster inflation rates that will lead to the Federal Reserve to hike US interest rate in the near future.

That brings us to the selloffs in other currencies across the globe including our own Ringgit.

Other than oil and Fed, Ringgit was also affected by the devaluation of China's currency Yuan by its central bank, People's Bank of China (PBOC).

Malaysia's economy is closely linked to China via trade and investment.

Last year alone we exported RM101 billion worth of goods to China and we imported RM129 billion worth of goods from China.

Malaysia's Total Exports in 2015: MATRADE

Malaysia's Total Imports in 2015: MATRADE

China is Malaysia's second largest export destination and our biggest source of imports.

Economic slowdown in China will lead to slower demand (imports) for foreign products and Malaysia as one of the largest exporters to China will get affected as China's consumption slowing down.

From June 2014 to June 2015, China's stock market increased by 150% as it was inflated and fueled by retail investors who borrowed to invest (on margin).

Shanghai Composite Index: Bloomberg

In June 2015, Shanghai Composite, China's main index benchmark dropped sharply.

China's stock market bubble popped sending shivers acrosss global financial markets inlcuding Malaysia's stock market:

FTSE Bursa Malaysia KLCI: Bloomberg

Ringgit which has already pressured by the plunging crude oil prices, experienced a sell-off as investors fled to safe haven assets such as US Treasury, US Dollar and gold.

Two months after the beginning of stock market turbulence in China and around the world, People's Bank of China (PBOC) decided to devaluate/weaken Yuan as much as 2% against the US Dollar; the largest devaluation since two decades ago. [7]

China Devalues the Yuan by Most in Two Decades: Bloomberg

This move was seen by the global investors as a panic move by Chinese authorities to halt its freefalling stock markets and boost its slowing economy.

Weaker Chinese Yuan, theoretically, would make China's goods cheaper than other countries goods which would make their exports more competitive than others.

Malaysia as an exporter nation was negatively affected as Ringgit depreciated further and breached the 4.00-mark first time since 1998 on the same day Yuan was devalued sharply by PBOC:

USD/MYR breached 4-mark on 12 August 2016: BNM

It wasn't just Ringgit which was adversely affected by PBOC's move, almost all other currencies dropped sharply against US Dollar on the day Yuan was devalued by PBOC:

Reaction of Selected Currencies On Yuan Devaluation: Bloomberg

These are all among the biggest factors that made Ringgit depreciated against the Dollar over the past three years not just because of plunging crude oil prices and certainly not because of 1MDB as Tony alleged.

Was Ringgit not affected by 1MDB at all?

It was but not as much as affected as it was by Fed's monetary policy, Yuan's devaluation and dropping crude oil prices.

If there is a confidence crisis among investors especially foreign investors, we'd see a huge jump in capital outflow due to divestment by foreign investors here.

We shouldn't gauge the portfolio investment flows because portfolio investments are short term investments made in stock and bond markets in which the investors (actually traders) buy and sell securities to make quick gains.

Instead we should observe the direct investment flows which made up of long term direct investments and involved buying more than 10% equity in local companies, setting up factories, creating jobs and such.

These are foreign direct investments in Malaysia since 2009:

Foreign Direct Investments in Malaysia: BNM
"Credit" refers to inflow of funds or amounts received by direct investment enterprise in Malaysia from foreign direct investor and affiliate in the form of equity capital, reinvested earnings, loan transactions, trade credits as well as other capital receipts while "Debit" refers to outflow of funds or amounts paid to foreign direct investor and affiliate from direct investment enterprise in Malaysia due to liquidation of investment, loan transactions, trade credits and other capital payments.

Even when in crisis of confidence as alleged by Tony, Malaysia still recorded higher FDI receipts (credit) year-on-year in 2014 (RM112 billion) and 2015 (RM128 billion) and on track to record another higher FDI inflow this year (*note that 2016 figures above are for January to September only).

Even though FDI outflows increased too, on net basis (credit minus debit), it recorded higher net FDI inflows in the years where Tony said Ringgit was the worst performer in Asia.

The second finance minister was right to say that there's no cause for panic regarding Ringgit depreciation.

Some things like Federal Reserve monetary policy, weaknesses in China's economy, People's Bank of China actions are beyond government of Malaysia's control.

When the fear over Trump's policy expectation dissipates and when investors get more clarity from global economic and financial markets outlook, we'd see Ringgit rebounds from its current levels as we have seen many times before.

Politicians like Tony Pua should stop spreading fears among the Malaysians for the sake of scoring some political points if they have nothing to contribute.

Tony should also read more about global financial markets, what causes emerging market currencies to depreciate, Federal Reserve actions, China's economic and financial markets outlook and such.

Just because you don't have a shred of confidence in our country's economy, it doesn't mean there are none among other Malaysians and foreign investors. 


  1. We need more sharing like this. Dont let them get away giving false allegations

  2. *When the bond yield rise, the price fall.

    1. yields rise because prices fall. not the other way around. investors sell bonds, prices fall, yields rise.