Nhóm Chơi Tài Xỉu:Ringgit meltdown \u2013 preparing for the worst

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WHILE the Malaysian finance minister is busy recording TikTok videos to convince the public that the country’s economy is on solid footing, the ringgit continues to descend, putting Malaysia’s foreign debts in foreign denominations in a precarious situation. In addition, given that Malaysia has very high food imports, the food costs for many in Malaysia are expected to soar. 

Malaysia’s unbridled politicking is not helping the ringgit situation either.

Research in economics and finance over the decades established that the strongest predictors of an imminent speculative attack on a currency are the behaviour of the home country’s international reserves, the real exchange rate, domestic credit, credit of the public sector, and domestic inflation. The appearance of any of these indicators or a combination of them severely curtails the government’s ability to defend an attempt to devalue the national currency.

For instance, stagnated or depleted international reserves void the government’s capacity to maintain its currency within predetermined bounds by dumping international reserves.

Sliding exchange rate, especially in combination with the belief that this trend will continue (based on fundamentals), informs speculators that the government of a targeted country would not opt for the strategy of aggressive borrowing in foreign currencies to stem speculative attack as long-term depreciation will only increase the costs of repayments of both the principal and interest rates.

Expansion of the domestic credit, as well as credit to the public, makes intervention through interest rate increase implausible option as doing so may push a large proportion of individuals and companies into default and send turmoil through the entire financial system.

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This strategy of currency defeat is also not an option in case of rising domestic inflation, as it will undoubtedly send domestic inflation to new highs.

When the above conditions are met, the target country is basically “trapped” or “ripe” for a successful speculative currency attack.

Things have changed since Emir Research published its warning on the potential ringgit slide, but not in the best direction — the updated figures are as follows.

Dwindling international reserves

Malaysia’s foreign currency reserves fell precipitously below the psychological US$100 (RM455) billion mark in sync with the soaring USD/MYR rate (weakening ringgit) post the announcement of the Federal Reserve on the rise of US interest rates, with the latest level reported by BNM at US$96.1 billion while total gross international reserves stood at US$108.2 billion as of August 30, 2022 (Figure 1).

Low foreign reserves (that are potentially sliding lower) is critical for a country that highly depends on food imports (RM63.3 billion in 2021). And, given the high dependency of local food supply chains on intermediate foreign inputs leading to the possible closure of local agribusinesses due to decades-high inflation raging through global supply chains coupled with the persistent absence of credible food security strategy to date, Malaysia’s dependency on food imports is likely to grow even higher. Sadly, Deputy Agriculture and Food Industry Minister has already warned about such a possibility earlier this year.

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