- To credibly address the recent speculation whether Malaysia indeed appear to be ripe for an eminent speculative currency attack we must turn to the sound past empirical results and facts. The empirical research aiming to identify strong antecedents of a speculative currency attack has proliferated over the last two decades. The number of possible indicators of the possibility of an imminent currency attack is simply too many to list.
- However, based on the seminal meta-analytical review by Kaminsky, Lizondo, and Reinhart (1998) of the previous empirical literature, few economic indicators have emerged as being particularly effective. These indicators, which have been consistently found to be significant predictors of the currency attack across multiple countries and in multiple research settings are: behaviour of international reserves, the real exchange rate, domestic credit, credit to the public sector, and domestic inflation.
- The appearance of any of the above mentioned indicators or their combination severely curtails government ability to successfully defend a speculative attempt to devalue their currency. For instance, stagnated or depleted international reserves void the government of an option to be able to maintain its currency within predetermined bounds through the dumping of international reserves. Sliding exchange rate, especially in combination with the believe that this trend will continue, informs speculators that government of a targeted country would not opt for the strategy of aggressive borrowing in foreign currencies in order to stem speculative attack as this type of intervention is extremely costly in these circumstances as repaying principal and interest by taking up borrowings or debts when the currency is stable with an impeding collapse will only increase the costs of repayments both principals and interest rates.
- Expansion of the domestic credit as well as credit to the public make intervention through interest rate increase very unlikely option as doing so may push a large proportion of individuals and companies into default and send the turmoil though the entire financial system. This strategy of currency defeat is also not an option in case of rising domestic inflation as it will certainly send the domestic inflation to the new highs. Therefore, government of a targeted country is basically “trapped” or “ripe” for the successful speculative currency attack.
- In the context of Malaysia, we have been seing the dizzying pace in the growth of national and private household debts. The national debt grew from a low of RM90 billion in 1997 (the currency and financial crisis year) to RM847 billion in 2015, registering a whopping 841% debt growth. (Source, The Economist) Certainly, a growth rate that we will not, we want to be proud of. The debt level was more manageable in 1997 which stood at RM97 billion, but after 17 years, in 2014, it ballooned to RM677 billion. In 2003, when Tun Abdullah Badawi took over the reign, the national debt was RM188 billion. 6 years later, in 2009, when he passed the baton to Najib, the national debt doubled to RM376 billion. After five years of Najib’s administration, in 2014 the national debt almost doubled to RM677 billion. Looks like Najib adheres to “In Debt We Trust” and with his other love of “Cash is King”, the nation certainly moving a very slippery downhill to disaster. From the Khazanah Research Institute Report we saw another startling statistics, i.e the personal household debt that stood at 86% to GDP. This addiction to debt, be it on national or personal household level, will only worsen the situation.
- The annual Auditor General Report too has shown us that between RM23 billion to RM40 billion is lost through leakages and financial mismanagement. Malaysia also had 18 consecutive budget deficits since 1998 and the trend is set to continue with the weak domestic economic resiliency fuelled by poor sentiment, in addition to the generally weak global economy outlook. The real RM exchange rate depreciation and the continuous rising domestic inflation and imported inflation due to RM depreciation just makes it worst.
- Hence, it is safe to conclude that Malaysia is within the range of speculative currency attack given the indicators for possible speculative currency attack is prevalent in the following indicators :
- Stagnating or Depleting levels of international reserves in real terms
- The real exchange rate depreciation
- Domestic credit
- Overexpansion of the credit to the public sector
- Rising domestic inflation
- Furthermore, while controlling for the above economic variables, some political indicators transpired as rendering significant additional explanation to the occurrence of currency speculative attacks.
- Specifically, across numerous emerging economies, the following political factors were found to be associated with the occurrence of speculative currency attacks. Elections and political instability were found to be positively associated with the likelihood of a speculative currency attack (Bussie`re & Mulder, 2000). “Strong” (measured by both their margin of legislative majority and fragmentation of opposition parties) or politically autonomous government as well as more democratic government, as opposed to a weak and less democratic government, was found to be negatively associated with the likelihood of a speculative currency attack (Block, 2003).
- Weak and less democratic government must be ready to strongly communicate their willingness and readiness to defend currency attacks with appropriate monetary and fiscal policies otherwise market expectations set by economic and political conditions may become self-fulfilling.
- Hence the questions needs to be asked are as followings:
- Are the government cognizance of the fact that there are possibility of imminent speculative attack on RM ?
- Are there any early warning signals for the government to monitor and track of this possible speculative currency attack ?
- If yes, are there preventive measures to stem such attacks and what are those ?
- Do we have, God forbid, if the speculative currency attack occurs, sufficient reserves to defend RM ? And for how long ?
- As the defence using reserves can be a double edge sword, will there be a plan B ? If yes, are there are going to be pegging of RM to US$ and capital control ? Or are there any other plan ?
- In the 1997 and 1998 situation the pegging and the capital control did help to stem the speculative attack, but the landscape was different with strong economic fundamentals and stable commodity prices. Now the landscape is quite different with weak domestic sentiments, poor governance in all spheres of government machineries especially with the high level corruptions being a new norm, in addition to the weak global economy. So what are the specific steps if any, the government has, should the unthinkable happens ?
Block, S. A. (2003). Political conditions and currency crises in emerging markets. Emerging Markets Review, 4(3), 287-309.
Bussie`re, M., & Mulder, C., (2000). Political Instability and Economic Vulnerability. International Journal of Finance & Economics, 5(4), 309–330.
Kaminsky, G., Lizondo, S., & Reinhart, C. M. (1998). Leading indicators of currency crises. Staff Papers, 45(1), 1-48.