Badawi's State Of Euphoria - Revisited

Hantu Laut

Should we worry about the state of the economy? Our government have assured us that this country would be spared from the global recession and we have the safeguards to ensure we wouldn't be caught with our pants down.Do you believe them? Is there something they know that we don't? Surprisingly, even the Governor of Bank Negara had confidently said that there wouldn't be a recession in Malaysia.

How much money have the government spent to prop up the ringgit and the stocks market? Without intervention the ringgit would have depreciated much more against the US dollar.All major currencies except the Japanese Yen have depreciated against the dollar.The ringgit had no reason to stay at its present level other than two possibilities..... our export receipts have increased tremendously where we convert US dollars to ringgit or more likely Bank Negara is spending our money to prop up the ringgit.The latter sounds more plausible.

Below are US dollar against ringgit and other major currencies for July/Nov 2008:

US$1.00 to:

British Pound - July 0.49 Nov 0.69 -40.8%
Australian Dollar - July 1.01 Nov 1.53 -51.4%
Euro - July 0.62 Nov 0.80 -35.5%
Ringgit - July 3.26 Nov 3.53 -8.3%
Singapore Dollar - July 1.36 Nov 1.49 -9.6%
Japanese Yen - July 107 Nov 99 +7.5%

From the above you can see that the ringgit is seemingly a strong currency, is it ? The ringgit had also appreciated against other major currencies not because of its own strength but more due to the depreciation of those currencies against the dollar.I expect the ringgit to find its own level when the intervention stopped.

The bull run on the dollar was mainly due to China propping it up to protect its huge foreign exchange reserve of US$1.5 trillion in dollars and gold.How long the exercise would prevail is hard to tell.

Below is an article I wrote in January 2008 on the contagious US recession.


Badawi's State Of Euphoria

Written by Hantu Laut

Wednesday, 30 January 2008

It’s whistling past the graveyard to think that Malaysia is going to escape a US downturn unscathed Prime Minister Abdullah Ahmad Badawi is probably wrong if he is as confident as he says he is that that Malaysia is positioned to avert any negative fallout from a threatened US recession by virtue of trade with the rest of Asean, which on its surface outweighs that of the US. Following the Davos conference in Switzerland, the prime minister pointed out that 86 percent of Malaysia's GDP is domestically generated and added: "This has become one of our economic strengths (as we are no longer acutely dependent on external trade), and these strengths have come from the policies that we have drawn up and implemented, which are far-sighted.” The speech and figures, probably prepared for him by the Ministry of International Trade and Industry, are hardly realistic. While the Malaysian economy has been robust over recent years, his boast that the country is immune from a US recession is incorrect. There are direct and indirect elements that can make a US recession contagious, not only to Malaysia and other countries in Asia. Using data from Malaysia’s state-owned External Trade Development Corporation (MATRADE), the US is still Malaysia’s biggest trading partner, with total trade of MR170.80 billion in fiscal year 2006. In 2006 Malaysia exported RM589 billion to all markets. Almost 77 percent came from manufactured products, 62 percent of that from electronic items. The small domestic market would not be able to consume excesses from a contracting export market. The major manufactured products for export, especially electronic and electrical products, are not suitable for domestic use. What are Malaysians going to do with a few billion dollars worth of unsold semiconductors, computer chips and other high-technology products? In the same year, export trade with Asean countries was RM154 billion. It is safe to assume that more than 60 percent of exports to Asean countries went to Singapore. Malaysia’s trade with Singapore was MR146.9 billion, making it the second largest trading partner after the U.S. With the exception of Thailand, trade with other Asean countries was insignificant. Lumping Singapore together with other Asean countries to show market diversification is self-deceiving and unjustified. Being the second largest trading partner and for the sake of clarity, Singapore should be classified individually. There also seems to be a great discrepancy between MATRADE figures and those given by an independent body SUITE101.com, which quoted Bridgesingapore.com, usembassy.com and the CIA World Factbook as its sources. The data shows Singapore's total trade with Malaysia in 2006 was US$77 billion. Taking an exchange rate at a constant US$1.00 - RM3.40, trade with Singapore was a whopping RM262 billion, not the RM146.9 billion MATRADE uses, making it the biggest trading partner, bigger than the US. Was the huge difference a result of under- and over-invoicing? It's difficult to say which figures were correct. This can only be established if the external trade corporation were to openly dispute the figures from the other sources. The majority of exports to Singapore are re-exported, with a big portion going to the US. In 2006, Singapore re-exported S$204 billion out of total exports of S$432 billion. Singapore exports have weakened over the past few months, signalling slower growth in 2008. Abdullah Badawi's assurance that trade with other Asean countries outweighs that with the US thus doesn't hold water. The biggest single entity in the Asean region is still Singapore, as has always been the case. It will continue to be Malaysia's biggest trade partner for a long time to come. A recession in the U.S would bring reduced volumes of purchases and falling prices which will subsequently affect Singapore's imports from Malaysia. Another motivating factor for Malaysian exporters to use Singapore is the practice of under-invoicing, in which certain amounts of export proceeds are retained in Singapore. (Many Malaysian exporters use this facility to keep some funds outside the country. Similar practices have been carried out by log exporters from Sabah and Sarawak, using Hong Kong as their base. With millions stashed overseas, some Malaysian companies from Sarawak have become the biggest loggers in the world, partly financed by the Malaysian Inland Revenue Department, in the form of tax evasion.).Read more......