Alternative Views: ‘Chickenomics’ highlights eroding value of ringgit

This article first appeared in Forum, The Edge Malaysia Weekly, on June 27, 2022 - July 03, 2022.
Alternative Views: ‘Chickenomics’ highlights eroding value of ringgit
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Come July 1, Malaysians will further feel the effects of inflation. Price controls on chicken and eggs — the cheapest sources of protein — and higher-end cooking oil will be relaxed.

So far, Malaysians by and large have been relatively sheltered from the effects of rising global inflation. Other than eating out, which has become significantly more expensive, households have absorbed the increasing prices of goods and services well.

Thanks to subsidies and control mechanisms, most of the commonly consumed items and utilities such as gas for cooking and petrol are in adequate supply. Unlike in Sri Lanka, Malaysians do not have to queue in long lines for petrol or cooking gas cylinders.

In situations where price controls are not effective, the government intervenes in the supply-demand dynamics with measures to divert food to the domestic market, although with only limited success.

An example is the poultry industry where exports were curbed from June 1 in an attempt to increase supply to the domestic market.

The chicken shortage came about because the larger poultry farmers in Malaysia tend to export their produce to Singapore, where the birds fetch higher prices. At the same time, the medium-sized and smaller poultry farmers that supply to the local markets did not have their operations up and running as demand during the two years of the pandemic had been crippled, forcing many of them to close.

As the pandemic eased, the farmers found it uneconomical to resume operations because the cost of production had gone up by 30%, and they could not pass this on to consumers because of the price controls.

As expected, the export ban on chicken lasted only two weeks before it was eased. And come July 1, a new ceiling price for chicken is expected to be set.

The impact on the man on the street is that he would need to fork out more for the same quantity of protein purchased. In a nutshell, the purchasing power of each ringgit is reduced because of inflation.

Inflation has wreaked damage on the capital markets. It has caused volatility where prices of fixed-income instruments are falling due to rising interest rates. Stock markets are volatile and currencies are depreciating against the US dollar.

Bursa Malaysia peaked in February this year. Since March, it has been on a gradual downtrend, dictated largely by the developments in the US. 

US Federal Reserve chairman Jeremy Powell just stopped short of admitting that the world’s largest economy is staring at a recession later this year or early next year as it continues to raise interest rates to tame inflation.

The Fed raised interest rates by 75 basis points earlier this month and is poised to increase the lending rate by a similar quantum next month. By the end of the year, the rate is expected to be 3.5% — a significant jump within a year considering that the Fed funds rate was only between 0% and 0.25% in January this year.

No economy would be able to withstand such a sharp hike in interest rates within such a short span of time without compromising on economic growth. But the US has no choice because it is wrestling with spiralling inflation, which is at the highest in 40 years.

The effects of a possible recession in the US, the supply disruption due to the Russia-Ukraine war and China’s sporadic lockdowns continue to reverberate across the globe.

There are very few places for investors to put their money.  There is virtually no escape.

The record high transactions in the US Federal Reserve reverse repurchase agreements (see chart), better known as reverse repo agreements, underline that money is better held with central banks even though the returns are measly.

Repurchase (repo) and reverse repo operations are carried out by the Fed to ensure monetary stability in the financial system. The end effect of repo operations is that money — mostly overnight — is injected into the banking system to ease liquidity.

The reverse happens in the case of reverse repo where banks, money market managers and others with excess cash place their money with the Fed because they have no place to invest it. For that, they receive very low returns.

In the current scenario, the measly return that the Fed offers still seems better than holding money and having no place to invest without the danger of seeing its value erode.

Reverse repo agreements have been gradually picking up since a year ago. Their total value was US$770 billion a year ago. The value hit US$1.3 trillion in November and started to move into a higher gear from this February. The value is now at a record high of US$2.3 trillion (RM10.1 trillion).

Coincidentally, on Nov 9, 2021, Bitcoin peaked at US$67,000 while in January, the Standard & Poor Index was at its highest.

The “smart money” obviously saw the turmoil in the capital markets and the inevitable rate hikes when speculative bubbles were hitting their highs. And they started to place the money with the central banks because there were no safe havens.

In fact, all investment platforms are going through turbulence because of inflation.

The only exception is probably gold, whose value has been fairly stable. But gold is not the best of investments because it is not as liquid as equities or bonds. Also, it does not yield dividends.

Another reasonable hedge against inflation is property, but property prices tend to come down during recessions.

In Malaysia, property prices have stabilised, indicating that they have almost reached the bottom. But no one can say for sure if it is the best option to put money into now to fend off inflation because a recession generally tends to drag property prices lower.

M Shanmugam is a contributing editor at The Edge

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