The Malaysian ringgit, under pressure from international currency traders betting against a stalling economy and a major political crisis, has hit the psychologically important barrier of RM4:U$1 as Bank Negara, the country’s central bank, throws its reserves at the attempt to stop the slide.

The economic problems have hit the stock market as well, with the index falling from a high of 1879.62 a year ago to 1635.77 on August 11, down more than 17 percent, making it among the worst performing markets in Asia.

The currency gyrated wildly on Tuesday, August 11, an indication that currency traders are after the ringgit in earnest. Although no figures have been published in the past few days, the central bank is believed to have spent at least US$11.5 billion on buying ringgit in order to keep the price up. It is now at a 17-year low despite the fact that the central bank is reported to have spent as much as US$15 billion of its reserves to try and maintain control. Reserves have fallen from about US$140 billion to around US$100 billion.

“It is extremely volatile, there are huge swings, signs that Bank Negara has lost control,” a European banker told Asia Sentinel. The currency ended the day at 3.99 to the US dollar.

Zeti Akhtar Aziz, the central bank governor, has been out of sight for several days as forces within the government of Prime Minister Najib Razak are believed to be seeking to drive her out of her position over suspicions she either leaked or condoned leaks of damaging currency transactions involving Najib and his wife, Rosmah Mansor, including to the highly critical Sarawak Report. Numerous requests for an interview with Zeti have gone unanswered, although a bank spokeswoman said bank officials would be available to answer questions at a scheduled press conference on August 13 to announce second-quarter GDP figures.

Heading South

The country may be headed for a perfect storm as a global slump in commodities has cut into exports, contracting for the eighth consecutive month in June. Gross domestic product has slackened slightly to a forecast of 4.7 percent. Both the Business Conditions and Consumer Sentiment Indexes maintained by the Malaysian Institute of Economic Research have fallen sharply in recent weeks. Two of Malaysia’s top trading partners, China and Singapore, have also suffered slowdowns and US imports remain lackluster. At least one Swiss bank is said to have downgraded Malaysia’s risk profile internally because of the country’s problems.

The collapse of the currency along with other problems, spells increasing trouble for Najib and the ruling Barisan Nasional, which is also under attack for an ill-implemented 6 percent goods and services tax that has been met with considerable confusion and anger.

Consumers have reacted with fury to the tax, implemented on April 1. Many retail businesses have gone out of business.

Last week, currency traders started to run into shortages of both US and Singapore dollars as consumers sought to trade out of the domestic currency. Under Malaysian banking regulations, retail customers are not allowed to change ringgit into foreign currencies. They must withdraw local currency and take it to domestic money traders to buy foreign currencies.

Harsh words from UMNO

A taste of the souring relations between the prime minister and his followers came on August 8, when a delegate to a United Malays National Organization woman’s wing gathering in Langkawai unloaded on the prime minister. Identified in a video as Alina, the woman accused Najib [in Malay] of “urinating on the three million UMNO members” for claiming he has the party’s full support over the continuing 1Malaysia Development Bhd. scandal. The YouTube video of the screed went viral.

The language in the bitter dispute is becoming increasingly hostile at many levels. Former Prime Minister Mahathir Mohamad termed Najib's claim that US$700 million (RM2.67 billion) deposited into his personal accounts – apparently from 1MDB – was a donation from the Middle East as "bullshit."

"Arabs are generous, but not that generous,” Mahathir wrote on his blog, Che Det, on August 10. “I could not raise even a single dollar from them for the Malaysian International Islamic University or for the Oxford Islamic Center.”

With the political crisis deepening and Najib deeply implicated in the scandal, his government has been paralyzed on economic policy. A wave of cabinet dismissals and police investigations into press leaks seems to indicate that Najib is focused on personal survival not governance. The levers that might right the economy are thus being largely ignored by policymakers.

In the middle of the Asian Financial Crisis in 1998, then Prime Minister Mahathir imposed capital controls on the ringgit and pegged it to the US dollar at RM3.80 after it fell to an unprecedented RM4.885:US$1, banning offshore trading in the currency and blaming “rogue speculators.”

The government may be forced to peg the currency again and institute capital controls, although doing so would cut sharply into the ability of multinational companies and banks to do business in the country.