International Traders Target Malaysia’s Ringgit

Sensing blood, global currency traders have declared war on Malaysia’s already-flagging currency, forcing Bank Negara Malaysia, the country’s central bank, to spend US$5 billion in the past month defending it. The ringgit has slumped by 21 percent against the US dollar in the past year, with the dive picking up speed. It has lost 11.98 percent of its value since May 1.

The pressure on the ringgit is partly triggered by a slowing economy, a rumored downgrade by Fitch Ratings and the troubles facing Prime Minister Najib Razak, who is up against a series of scandals that have resulted in at least one European bank downgrading the country’s risk outlook. The messiest of the scandals tracked US$680 million from the 1Malaysia Development Berhad government fund into his personal bank accounts, according to the Wall Street Journal and UK-based Sarawak Report.

Get Whitey

For Najib, the attack is a mixed blessing. While it plays havoc with the economy, in the past week he has gone on the offensive against foreign interests. In an extraordinary speech in Seremban on August 1, he warned “white people” to stay out of Malaysian affairs although his chief detractor is Mahathir Mohamad, the former premier who put him in the job.

Currency traders in Switzerland and other European countries were said to be shorting the ringgit in the expectation that the downward pressure would pick up speed. The traders are said to be position-buying British pounds against the ringgit in the expectation that the economy, stalling out because of the political crisis, will continue to fade.

Malaysian Ringgit vs. US dollar

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Central bank reserves are healthy but they have been falling steadily for months, from US$136 billion in July 2014 to US$105 billion, although the final figure doesn’t show on the chart below. Reserves amount to 7.8 months of imports. As the reserves per months of imports continue to drop, the situation is expected to grow increasingly critical.

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“They have lost control. The forex market is betting against the ringgit and is punishing Najib with no mercy,” said Pascal Najadi, a Moscow-based financial consultant who has made a crusade of trying to find the truth behind the murder of his father, a founder of what was the Arab Malaysian Development Bank and is now called AmBank – where Najib today keeps his money.

Zeti in the light

As Najib defends himself, the spotlight has fallen recently on Zeti Akhtar Aziz, the long-serving central bank governor, who has come under unprecedented attack from a flock of bloggers. Some of them quote the International Consortium of Investigative Journalists in attempting to tie her family to a series of secret bank accounts in the British Virgin Islands and other tax havens. Zeti is said to have records of all the 1MDB transactions and those into Najib’s bank accounts. There is no word of what she intends to do with the records.

One of the blogs, a Hong Kong-based outfit said to be put together by foreign interests, The Recounter, identifies Zeti as one of 13 people on a “top wanted list of conspirators against the democratically elected government.” There is no indication of what Zeti did to land on the list, which includes four other members of Bank Negara, Edge Group Owner and Publisher Tong Kooi Ong and Ho Kay Tat, Sarawak Report editor Clare Rewcastle Brown and others.

A request to Bank Negara for an explanation of the raid on the currency was not answered, nor was a request for a statement on the accusations about the bank accounts allegedly in the names of her husband and sons.

Asia Sentinel identified Najib’s wife, Rosmah Mansor, as being behind the pressure to drive Zeti out of the bank, to which her lawyers replied with a blistering denial and demand for a retraction. [Read her press release here.]

Economy at risk

The country’s economy is suffering from a steep fall in commodity prices, with Brent crude oil descending from US$105 per barrel to US$50.02 on Aug. 4. Palm oil has fallen from US$641 per tonne to US$606. Exports slid by 2.5 percent after a 0.5 percent gain in the final quarter of 2014,” reflecting mainly a decline in the growth of commodity exports and resource-based manufactured exports, amid lower commodity prices” according to Bank Negara.

But the situation has been exacerbated by the prolonged political scandal, which has turned attention away from efforts to revitalize the economy.

In addition to having to explain how the US$680 million ended up in his personal account at AmBank in Kuala Lumpur in 2013, Najib is also under prolonged attack for his role as the economic advisor to 1Malaysia Development Bhd, which is said to have RMB42 billion worth of debt, as much as RMB25 billion of it unfunded. There are allegations that a major portion of that was steered into the accounts of a family friend, tycoon Jho Taek Low.

On August 3, the Malaysian Anti-Corruption Commission said that the US$680 million in Najib’s accounts was from “donations,” a statement that raised more questions than it answered. It didn’t indicate where the “donations” came from or where they went. If the money was a personal donation, there is no indication that it was taxed. It has been suggested that the money was directed to the effort to win the 2013 general election, in which the ruling Barisan Nasional did very badly. But campaign donations are officially limited to RMB50,000 for state races and RMB200,000 for parliamentary seats. That much money washing through the electoral process would have set off alarm bells.

Impact

As the currency deteriorates, the price of imported goods and services, which amount to 69.9 percent of GDP, will grow sharply. There are already complaints about the rising cost of living. However, the price of exports will fall on international markets, making the country more competitive.

The options are to continue to defend the ringgit by throwing the country’s reserves into the fight, which is a losing battle, considering the trillions of dollars that float through currency markets every day. Despite the fact that Malaysia’s reserves remain relatively healthy, the forex markets are simply too big to bet against.

The alternative is to peg the ringgit against the US dollar, as former Prime Minister Mahathir Mohamad did in 1989 during the Asian Financial Crisis, which would endanger the billions the currency traders are betting. Mahathir was successful, as was the Hong Kong government in pegging the Hong Kong dollar to the US dollar during a currency crisis in the 1960s.

There are downsides to freezing the currency against the dollar. Given the diminishing reserves, it would require the implementation of currency controls, putting additional brakes on the economy. There are few attractive alternatives at this point.