As the great EM unwind continues unabated, we’ve noted that in some hard-hit countries, the terrible trio of falling commodity prices, decelerating Chinese demand, and looming Fed hike has been exacerbated by political turmoil.
In Brazil, for instance, President Dilma Rousseff’s approval rating is at 8% and voters are calling for her impeachment amid allegations of fiscal book cooking and corruption at Petrobras where she was chairwoman for seven years. This comes as the BRL looks set for further weakness and as the country grapples with stagflation and dual deficits.
In Turkey, President Recep Tayyip Erdogan has brought the country to the brink of civil war in an effort to nullify a strong showing at the ballot box by the pro-Kurdish HDP. In the process, he’s managed to put the lira under more pressure than it might already be under and indeed, the currency is putting in new lows against the dollar on almost daily basis.
Now, we turn to Malaysia where, as we documented exactly a week ago, the situation is tenuous at best and nearing a veritable meltdown at worst. As a reminder, here’s what happened last Friday:
With some Asian currencies already falling to levels last seen 17 years ago, some analysts fear that an Asian Financial Crisis 2.0 may be just around the corner. That rather dire prediction may have been validated on Friday when Malaysia’s ringgit registered its largest one-day loss in almost two decades. As FT notes [15], "sentiment towards Malaysia has been damped by a range of factors including sharp falls in global energy prices since the end of June. Malaysia is a major exporter of both oil and natural gas, with crude accounting for almost a third of government revenue.” The central bank meanwhile, "has opted to step back from intervening in the market in response to the falling renminbi, unleashing pent-up downward pressure on the ringgit.” That, apparently, marks a notable change in policy. "The most immediate challenge is the limited scope of Malaysia’s central bank to step in,” WSJ says [16], adding that “for weeks, it tried to stem the currency’s slide, digging into its foreign-exchange reserves to prop up the ringgit and warning banks from aggressively trading against its currency."
As you can see from the following, Malaysia's reserves are plunging in tandem with the ringgit's collapse:
[17]
On Thursday, central bank governor Zeti Akhtar Aziz was out reiterating that Malaysia has no plans to introduce a currency peg. That echoes comments she made last week, and along with a promise from Prime Minister Najib Razak that capital controls are not in the cards, is meant to reassure the market, where some fear the country may resort to the same drastic measures it undertook 17 years ago. Here's Citi:
The ringgit has traded to the weakest level vs. the US dollar since the 1998 Asian crisis, weakening by 30% even though BNM’s FX reserves have fallen $35bn over the past 12 months. On an effective exchange rate basis too, we estimate that the ringgit is just 1-2% from post-crisis lows. Together with the acceleration of the currency weakness in recent weeks and the unexpected jump in July CPI inflation to 3.3% – which we think is partly on account of the weaker currency – this has led investors to question how much further this move could extend.
The proximate cause of the pressure on the ringgit has been the weakness in energy commodity prices, the strength of the US dollar, relatively weaker FX reserve cover, and growing political uncertainty in Malaysia. The pressure is also magnified by the large participation of foreign investors in local markets. Foreign investors’ holdings of debt were $54bn (government bonds alone accounted for $43.2bn) and of equities were an estimated $98bn (on market-capitalization basis) at end-July. Reports of foreign investors trimming their exposure and of local corporates responding by increasing currency hedges have thus added to market concern about the ringgit.
Investors thus continue to look for a response from Malaysian policymakers. While we admit that heavy-handed measures are not warranted yet, the absence of policy intent even to restore confidence could further feed investors’ fear. Co-ordinated comments by Prime Minister Najib (who is also Finance Minister) and BNM Governor Zeti (highlighting still sufficient reserves, ruling out capital controls or a repeg) may have been such an attempt, although in these comments they did not suggest an intention to act to reverse or limit the pressure on the ringgit.
[18]
Malaysia's reserves stood at $94.5 billion as of August 14 and Zeti was quick to remind reporters that the country had built up its reserves "precisely for reversals." Reversals like this:
[19]
And lest anyone should think that there aren't political considerations at play in Malaysia just as there are in Brazil and Turkey, note that PM Najib Razak is facing calls for a no-confidence vote amid allegations he embezzled some $700 million from the country's development fund, charges which, when reported earlier this year by WSJ [20], caused the ringgit to fall to its lowest level against the dollar in a decade.
"A vote of non-confidence is necessary now because Najib has made BN members of parliament beholden to him by giving them lucrative posts in the government," former PM Mahathir Mohamad (who once called George Soros a "moron" for helping to trigger the ringgit's previous collapse) said in a blog post [21] on Thursday. From Reuters [22]:
Najib, under growing pressure over allegations of graft and financial mismanagement at debt-laden state fund 1Malaysia Development Bhd (1MDB), in August sacked his deputy, Muhyiddin Yassin, replaced the country's attorney general and transferred officers involved in the 1MDB investigation.
Mahathir, Malaysia's longest-serving prime minister, has become Najib's fiercest critic and withdrew support for him last year after the ruling Barisan Nasional (BN) coalition's poor showing in 2013 elections.
"A vote of non-confidence is necessary now because Najib has made BN members of Parliament beholden to him by giving them lucrative posts in the Government," Mahathir said in a post published on his blog late on Thursday.
"Even those who had come to me complaining about Najib's administration before, upon being given posts in his government, have now changed their stand."
The 90-year-old, who was once Najib's patron and remains highly influential in the country, has called for the prime minister to step down over the 1MDB furore.
For his part, Najib says no one should attempt to "hijack his leadership" as the PM post is for Malyasian voters to "give and take away."
And while that may be true, this will do absolutely nothing to help the country's already precarious situation and neither will persistently low crude prices, which is why when Citi asks (in the note cited above) "Malaysian ringgit, are we there yet?", we would have to respond "no, probably not."
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Bonus: Stocks unhappy, nearing bear market:
Bonus Bonus: In case anyone forgot [23]
