Malaysians Seek Currency Havens as Crisis Grows
Consumers in Malaysia are turning to money changers to trade the domestic currency for US and Singapore dollars, triggering a foreign currency shortage as a steeply falling ringgit cuts into their buying power.
Currency traders say the run on the ringgit is causing a shortage of US dollars as people try to move their money into safer currencies. At least two local banks are said to be limiting withdrawals to RM5,000 in cash at counters due to a shortage of cash. Any amount above RM5,000 must be withdrawn by bank check.
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.
Because of the liquidity crunch, middle-class Malaysians also are said to be moving their savings out of the country to Singapore, hoping to protect their assets and to make a quick gain by buying cheap ringgit when the currency market bottoms out at some future date. Financial advisors are said to be telling their clients to move savings out of Malaysian banks or transfer to offshore accounts in safer currencies.
This is a fine mess you’ve got us into
It is a further sign that the political crisis that has gripped the country for more than a year over the scandal-ridden 1Malaysia Development Berhad fund is starting to spread into the public at large. With the political crisis deepening and Prime Minister Najib Razak himself implicated over the scandal, his government has been paralyzed on economic policy. A wave of cabinet dismissals and police investigations into press leaks seem to indicate that Najib is almost wholly intent on his own survival rather than governing the country.
The levers that might right the economy are thus being largely ignored by policymakers and consumer confidence, according to latest figures from the Malaysian Institute of Economic Research, nosedived to 72.60 in the first quarter of 2015 from 83 in the fourth quarter of 2014 after averaging 104.90 from 2005 until 2015.
A wave of cabinet dismissals and police investigations into press leaks seem to indicate that Najib is almost wholly intent on his own survival rather than governing the country
An already-irritated middle class is growing more frustrated as a 6 percent goods and services tax has cut into spending and savings. Although the GST is theoretically a reform designed to improve accounting, reduce tax fraud and discourage dishonest business practices, it has caused confusion about its interpretation and outraged consumers.
“The economy is severely crimping,” said a Malaysian restaurant owner. “I have closed all six of my outlets. Businesses everywhere are closing. The GST has smashed the economy, with 1MDB and the political problems finishing it off. But the real issue affecting the whole country is the GST. We are facing a perfect storm. The GST, 1MDB, weak prime minister, weak Barisan Nasional, falling oil subsidies, the China slowdown, a possible rise in US interest rates and more.”
Paradigm Shopping Mall in Kelana Jaya in the Kuala Lumpur suburb of Petaling Jaya was among the first to record unusually high retail outlet closings with more than 20 retail shops shutting down within the first few months of the April 1 implementation of the GST.
Look out below
In the past year, the currency has fallen from RM3.80 to RM3.91 to the US dollar, heading for the psychologically important level of RM4 despite attempts by Bank Negara, the country’s central bank, to stem the slide by using the country’s US dollar reserves to buy ringgit. Global currency traders, sensing the deep problems in the Malaysian economy, have gone after the currency, driving it down in the past week alone from RM3.880.
The central bank has thrown at least US$10 billion into the latest attempt to save the ringgit. But the world’s currency markets, with trillions of dollars to throw at the assault on the currency, can easily overcome any defenses. The government faces the unappetizing choice of either turning to capital controls, which would constrict the economy, or letting the ringgit slide, which would drive up the price of imports and irritate consumers even more.
It is not all politics, of course. The pressure on the ringgit has been triggered in large measure by a slowing macro economy hit by the global slump in crude oil, palm oil and rubber among other key commodities. Two of Malaysia’s top trading partners, China and Singapore, have also suffered slowdowns. At least one Swiss bank is said to have downgraded Malaysia’s risk profile internally because of the country’s problems.
In addition, according to the Hong Kong-based financial analysis firm Asianomics, “the investment cycle has turned sharply and decisively down ever since spending by the government sponsored but private sector led Economic Transformation Program on infrastructure surge came to an end. Real fixed investment spending is growing significantly slower than GDP and as a result the ratio of investment to GDP has fallen below trend, with residual spending in negative territory and signaling an impending recession.”
Those economic problems have been exacerbated by the year-long political crisis triggered by 1MDB, which has the government scrambling to find funding sources to meet RM42 billion of liabilities. If Najib digs in and nothing can be done to move him aside, the crisis could drag on for years. Key institutions are already suffering, with more pain to come.
Bank Negara’s Zeti Akhtar Aziz, the long-serving central bank governor, has come under unprecedented attack from pro-Najib bloggers over allegations that her family has secret bank accounts in the British Virgin Islands. The internationally respected official, whom many believe could have evidence linked to the suspicious movement of hundreds of millions of dollars linked to 1MDB and the prime minister, has not been seen in several days.
She and several top officers of the bank are under suspicion of having given details of the 1MDB and other scandals to either reporters or government investigators whom Najib has now fired. The government is now said to be after Zeti’s head, a move that would deepen uncertainty and creation additional policy problems.