Monday, September 22, 2008

The Yanks And The Peg

Hantu Laut

Former Prime Minister Mahathir Mohammad dropped a hint that due to uncertainty in the world markets and rising costs of doing business in the domestic market the government should bring back the ringgit peg or otherwise known as fixed exchange rate.

The government should take heed and seriously consider this proposal in light of the high inflation and economic instability due to volatility in the world markets.

With the huge financial crisis in the US financial system requiring massive bailout, Malaysia's economy may not be spared the contagion of a US recession.

The financial crisis at Lehman Brothers,AIG and others financial malaise in the U.S can throw the US economy into serious trouble and hit the shores of other countries in matter of months.

The US government is now 80% equity holder of AIG through the bailout of US$85 billion to keep the company afloat.This is the first time in its history the US government had taken majority equity and management control of a private sector corporation.

In an even bigger mess is the sub-prime mortgage sector that put Freddie Mac and Fannie Mae into serious financial trouble.
These two companies do business of factoring mortgages from banks and other financial institutions and currently hold guarantee of US$5.4 trillion of mortgages.In the past, US Government bailouts were only in the form of loan guarantee without any equity participation or involvement in management.

The US have copied our ISA to detain and imprison so-called terrorists without trail. Now they are copying Malaysian-styled bailouts.

In 1980 the US Congress approved a loan guarantee of US$1.5 billion to save Chrysler from bankruptcy which amount was considered big at that time.Chrysler paid back the loan few years ahead of time and the government actually made US$313 million profit in stock options.

Why peg? Pegging can take out certain uncertainties in the economy and bring some degree of stability.It can give a stable atmosphere to foreign investors.With a peg investors can know what their investment value is, and therefore will not have to worry about daily fluctuations. A pegged currency can also help to lower inflation rates and generate demand, which results from greater confidence in the stability of the currency.

A pegged currency can also have its bad side.It can be difficult to maintain a peg in the long run.This fixed regime can often lead to severe financial crisis.If the government in its effort to maintain high value of the currency can no longer meet demands to convert the local currency into foreign currency at the pegged rate than the currency can become overvalued.There will be loss of confidence and investors may panic and there can be flight of capitals when investors converted the local currency into foreign currency before the currency is devalued against the peg.Such scenario can deplete the country's foreign reserve.

Such flight of capital can also happen in a floating regime which opposition leader Anwar Ibrahim claimed is happening to Malaysia due to mismanagement of the economy.It can be a bit of both, the unstable economy and political instability.

Pegging is often associated with countries that have unsophisticated capital markets and weak regulating institution.

In the 1997 Asian financial crisis Malaysia took an unprecedented and bold step to peg the ringgit while Thailand, in similar crisis, allowed the bhat to float.By the end of 1997 the bhat had lost 50% of its value.

In the 1997 crisis Mahathir much to the chagrin of former Finance Minister Anwar Ibrahim who wanted to adopt IMF sponsored bailout and financial reforms took an unconventional and bold step. He pegged the ringgit to put a stop to speculative currency trading and stabilise the currency.The properly managed peg helped Malaysia to recover faster than expected.

It goes to show that not only Mahathir was a better politician and need not shout his head off to be heard, he has shown that he was also a better finance minister and better economist than Anwar Ibrahim, who had been more than willing to accept the spoon-fed proposal from IMF.

The government of PM Abdullah Badawi should not completely ignore the advice of the former prime minister.The nation needs speedy reforms to create confidence in the economy.


Fazrul Shahril said...

Salam Tuan,

I hope this can help and save our ringgit...


NEIL said...

Mahathir was lucky at that time.I can't imagine the financial world laughing at us for our indecisive action in allowing the on and off pegging of our ringgit.When you keep on having flip flog decision then there is something very wrong with our system.I think we should let it stays as it is.There is nothing wrong with our currency except now there is a world financial turmoil.

Anonymous said...

Neil..Fiscal, monetary, forex policies depend on conditions + are not set in stone.

Hantu - "It goes to show that not only Mahathir was a better politician and need not shout his head off to be heard,"

HA HA HA HA HA So right....

Anonymous said...

Madir better than anwar

but i think there is noone worst than badawi?

Anonymous said...

Dear Hantu Laut,

Attached is another story i would like to share with you. I hope you can make it an entry in your blog pls. Thank you sir. Hidup Sabah!


Why Najib shld stick to Abdullah

The most important political development in town has very little to do with Anwar Ibrahim. Instead, it is about the dynamics of the relationship between the Prime Minister and his deputy and how they approach the UMNO party elections that are set to commence with the divisional meetings on 9 October.

Neither Abdullah Ahmad Badawi nor Najib Tun Razak wants to fight the other. They know that this would be disastrous for the party and even prove to be the final nail in its coffin. Both want to honour the spirit, if no longer the exact letter, of the transition plan which originally intended for Najib to take over the premiership and party presidency in June 2010. It was a deal brokered directly by the two men and endorsed by the party Supreme Council.

But things began to fall apart after the loss at the Permatang Pauh by-election even though this had very little to do with Abdullah's leadership (in fact it was seen more as a battle between Anwar Ibrahim and Najib). There was a resurgence of dissent within party ranks led by vice president, Muhyiddin Yassin, and egged on by Mahathir Mohamed from the outside. This was an opportunity to renew the pressure on Abdullah to go now rather than later. But the spark that lit the fire was Najib's statement a couple of weeks ago that although he was committed to the transition plan, he would also leave it to the divisions to decide whether they want to support it as well. Politics is all about signaling. For many in the party, that statement by Najib was a signal that he would contest the presidency against Abdullah.

Opportunistic dissenters like Muhyiddin latched onto Najib's statement and instigated the grassroots to create a groundswell effect against Abdullah in order to pressure him to bow out in December. For Muhyiddin, this would be a dream scenario with him walking into the deputy presidency of the party probably unchallenged and thereby becoming also the Deputy Prime Minister. Everything came to a head at last week's UMNO Supreme Council meeting where three members – Muhyiddin, Shafie Apdal and Rafidah Aziz - came out to ask Abdullah to hand over power to Najib earlier than the scheduled timetable. Pro-Abdullah forces in the council were told to stand down during the meeting in order to not worsen the situation.

So what does Najib do now? For all intents and purposes, he is still outwardly committed to the transition plan and does not want to fight Abdullah. He knows that if he digs his heels in with Abdullah, the top job will be there for him by mid 2010 at the latest but in all probability much earlier since Abdullah himself has said that he is willing to be flexible about retiring sooner. The only thing that worries Najib is that if he sticks with Abdullah and there is a challenge from a Tengku Razaleigh Hamzah-Muhyiddin team, he might get swept away along with Abdullah. However, these fears are unfounded. Party leaders know that if Najib swings his support totally behind Abdullah and their forces work together on the ground, there is no other alternative combination that can beat them.

For Najib, if he decides not to honour his word to Abdullah, he knows he will be stuck with Muhyiddin as his deputy. This would be a problem for him later because the two men are suspicious of one another having once been rivals for the job of Abdullah's deputy. Muhyiddin has also demonstrated via his dissent towards Abdullah that he is a man who has no qualms stabbing his boss in the back, and may do the same to Najib especially in a time of political crisis. Muhyiddin will also not be beholden to Najib because he will think that his elevation to deputy premier and deputy president of UMNO has little to do with Najib. So for these reasons, Najib will not want Muhyiddin as his deputy.

Najib would be in a much more comfortable position if he goes with the transition deal with Abdullah, and then when the time comes for Abdullah to step down, Najib would have three vice presidents to choose from as his deputy. Not only does this give him the luxury of choice but it will most certainly make the person he selects as his deputy completely beholden to him because it will be entirely Najib's decision unlike the scenario of having Muhyiddin forced on him.

There are also other reasons Najib should stick with Abdullah. As far as UMNO members are concerned, Najib may be popular. This is courtesy of a solid network that he has cultivated for the last three decades. But his image and credibility publicly is something else. For many people Najib is synonymous with the brutal murder of the Mongolian woman, Altantuya Shaariibuu. Regardless of Najib's repeated religious oaths that he never even met Altantuya, the taint refuses to go away especially since the man accused of abetting the murder, Razak Baginda, was a close advisor and friend to Najib. Apart from the Altantuya case, Najib is also dogged by shady arms purchases notably the procurement of Sukhoi fighter jets and submarines in which Razak is suspected of pocketing hundreds of millions of Ringgit worth of commission direct from the principal. So with the SAS (Sukhoi, Altantuya, Submarine) scandal tarnishing his public image, Najib still needs Abdullah as a shield of sorts. In fact, Anwar is relentless in his attacks on the SAS issues exposing it as Najib's vulnerable Achilles' heel. So long as Abdullah is around, Najib can use the time to rehabilitate his public image especially with his new portfolio at the Treasury where he can enact popular policies to deflect the public's attention from the SAS issues.

Finally, the last thing Najib wants is to go through a bruising fight with Abdullah. Najib may ultimately win the battle with current sentiment against Abdullah and his formidable network in UMNO, but could lose the war because of a damaged and divided party.. Abdullah may be against the ropes but he's not going to be a pushover. His supporters will use every advantage of incumbency to fight any challenge and it will significantly split UMNO. This is something that Najib can ill-afford. Even if he takes on and beats Abdullah, he will be left with a party ruined. The implications of this are serious. If BN component parties see a broken UMNO, they might just take it as a signal to jump ship and join Anwar. That could prove to be the final act on the demise of UMNO and it will be on Najib's watch.

So although Najib may feel insecure about taking his chances with Abdullah for the fear of going down with him, he stands to gain more from sticking to the transition plan and fighting it out by Abdullah's side. It will give him the freedom to choose his deputy, a shield against attacks, time to rehabilitate his battered public image and it will avoid a damaging contest that can destroy UMNO. It must also be remembered that the next few months will be crucial on Anwar front. The sodomy trial will get under way and Najib will not want to be alone when all the sordid details of the case are revealed given his association with Saiful Bukhari Azlan who accuses Anwar of having sodomized him. Without Abdullah, the focus will be entirely on Najib and this could damage further his public image.

Given these arguments, Najib should come out soon to give a categorical statement to support Abdullah's candidacy for party president. It may not only appear to be the wisest choice but also one that will make Najib most secure in the long run.

Anonymous said...

worldwide, it has shown that pegging does not work to the nation's benefits in the long run. the only exception is Hong Kong currently. but then, the state is financially very discipline with strong reserves, operates an open market and has zero tolerance for corruption.

Fixed exchange rate does not fix the problem of inflation. Fixed exchange rate only distorts the market and the country will have to bear the consequences in the long run. Arent we feeling the effects from the unnecessary prolonging of the last fixed exchange regime with low growth in income level for the past years and comparatively low investment rate? Fixed exchange rate is only recommended as a short term solution during times of excessive volatility!

Hantu Laut said...

fazrul shahril,
Yes and no.There are others factors in the economy, pegging is just one of them.

Hantu Laut said...

You are right there but the government should not totally ignore the option.

Hantu Laut said...

jed yoong,
The man in a hurry will stumble and fall again.

I don't think he believes in democracy,he wants power by hook or by crook.