Saturday, July 23, 2005

Unpegging the Ringgit and playing chicken game with China

Title: Unpegging the Ringgit and playing ‘chicken game’ with China.

Its good news that the government finally unpeg the ringgit. Given the situation, Bank Negara had no choice but to unpeg, because to leave the peg after China’s move means leaving the ringgit open to speculation. Huge amount of speculative money would flow into the country to make quick profit. Never mind what Finance Minister, Governor and Prime Minister previously said about leaving the peg for the benefit of the country.
Its good to see that BNM prepared to swallow back its words for the benefit of the country. Lets be frank, Malaysia is just a small economy, a small fry in the league of big and powerful whales and sharks. We have to find our own niche, and improvise to prosper; we cannot dictate others to our own terms. (Unless we have an all important commodity that others are begging at our doorstep.)
A floating ringgit, even if a dirty float, is the first step toward finding our competitive edge. The next step is to improve our government, administration and improve the cost of doing business in our country. Efficiency is the key for our future success.
That’s means corrupt practices, unfair advantages to certain groups or anything that contribute to a slide to rot is not good for the country. Lets have a fair rule for all, and everyone be treated as equal. If you start giving special treatment to certain group of people in the country, then sooner or later some other group will claim they are more deserving-there is no end to it.
Looking at the fundamentals, we would expect that the US dollar to continue to strengthen in the short term. Alan Greenspan had just increased US interest rates a week ago, attracting foreign funds for the high yield and safety features of US dollar. The ringgit, being a petro dollar to some extent, and net exporter is expected to rise faster than the US dollar. (This is only true if BNM does not print money faster than the market can absorb)
Why do we say that the outlook for US dollar is good in the near terms? Well, where else you could invest in companies that is world class and relatively cheap? The market in the USA is the most transparent in the world, with good judicial system and everyone is treated equal. Over 200 years of stable government with history to prove it. Companies in the US are well run generally, although some mismanagement here and there, the culprits are quickly brought to justice. With the current security scare in the world, terrorism and all, naturally everyone bank on the US dollar.
Another thing to take into account, Asian government hasn’t been weaned of their dependence on export to solve their income and employment problems at home. They need US market more than ever, so they will keep on exporting to the US and spend their surplus USD on US Treasury Bills. Until someone can show them that there is a more profitable investment somewhere else, like investing in their citizens’ standard of living for instance.
With this unpegging, BNM can now concentrate on other worthwhile targets- e.g. inflation, income and employment. We believe that inflation is foremost in the BNM’s agenda at the moment, given the previous 7 years agenda of increasing income and employment. What can we expect? In our view, the interest rate would increase in the near term in tandem with US interest rate. This would reduce the inflationary expectation and curb spectacular moves by banks to increase market share by introducing juicy incentives. (Like CAHB’s recent incentive of 25 basis point below BLR for home lending.)