IN a recent research note, P K Basu of Macquarie Research expressed his view that the ringgit could fall to 3.95 against the US dollar by September 2015. This is hardly good news because it is a mere 0.05 sen short of RM4.
With the price of oil slipping and showing no signs of moving upwards in the near future, the outlook is grim. This will have repercussions for the government’s fiscal position. The prices of other commodities, specifically palm oil and rubber, are equally dull and do not seem likely to be able to undo any damage that low oil prices are causing.
The poor show on the side of commodities is enough to lead to a loss of confidence in the ringgit. But it is as if the whole situation has been orchestrated to promote a mood of pessimism. Several issues raise their heads in unison. The public outcry against the Goods and Services Tax (GST), the weak external demand, the possibility of higher interest rates in the US and the rapid outflow of foreign funds from the country have all contributed to the climate of uncertainty.
Unfortunately, one must add to these elements the repeated calls for greater transparency on the 1Malaysia Development Bhd transactions. Bad enough the Opposition has been harping on the risks involved and the spectre of irregularities, but worse still, former prime minister Tun Dr Mahathir Mohamad has raised his doubts on the project. Mahathir’s scepticism — and with RM42 billion at stake — contributes a splash of worry, unnecessary as it may prove to be in time.
As we all know, animal spirits and speculation drive markets. At the present moment, none of this is really working in Malaysia’s favour.
Several scenarios could arise. One outcome that can emerge is not too worrisome. In this picture, with the decrease in the price of oil, the ringgit declines and that gives rise to two phenomena — an increase in exports and decrease in imports. The latter comes about because, presumably, the low ringgit makes it difficult for households to maintain existing levels of expenditure on goods and services that need to be imported. That leaves us with a trade surplus.
A more undesirable outcome could come up if imports do not go down. Assuming we need to import certain goods and services, whether they be for personal consumption, or because the government or companies need to buy them. In that case, the low ringgit would lead to the cost of imports exceeding revenues due to exports. Then, we would have a trade deficit, and that leaves open the possibility of a current account deficit.
Yet another scenario can be drawn, and that is one where shrinking growth takes its toll on employment and household income. In that case, individuals could be pushed to default on their loans. With the prevailing high levels of household debt, this will have harsh consequences, should it happen. But as it stands, the threat of something as dire as this is distant. However, this thought experiment suggests that one should not play with fiscal profligacy, an activity that is as dangerous as playing with fire.
Malaysia’s current account figures have not been looking good in recent years. The current account balance decreased from RM102 billion in 2011 to RM39.9 billion in 2013, then increased in 2014 to about RM49.5 billion. The current account as a percentage of gross national income has slipped from 11.9% in 2011 to 4.8% in 2014.
At any rate, a current account deficit must be avoided. Without being simplistic, this means Malaysia has to promote its exports and decrease its imports. The latter could imply import substitution, a return to an earlier period in Malaysia’s economic history.
The other way to deal with the problem, by increasing exports, has its constraints. The limits to promoting exports are probably not as wide as they would have been in more buoyant global economic times.
Whatever scenario transpires, tough times are on the horizon for households, what with the GST and the hike in the cost of public transport. A number of industries, particularly those related to the oil and gas, financial and palm oil sectors, will have to brave choppy waters.
Even if the ringgit takes a further dip, as some observers expect it to, a crisis may not be imminent. But it looks as if we will have to brace for a low growth rate this year.
Dr Shankaran Nambiar is the author of The Malaysian Economy: Rethinking Policies and Purposes. He is a Senior Research Fellow at the Malaysian Institute of Economic Research. The views expressed in this article are his own.
This article first appeared in Forum, The Edge Malaysia Weekly, on March 30 - April 5, 2015.