Whither the ringgit? US Inflation & workforce are the bigger problems

 

WITH the ringgit passing the RM4.50 mark to the mighty US dollar, questions have been asked as to where the ringgit is headed, as it has dropped almost 9% year-todate and at a level last seen during the Asian Financial Crisis in 1998 – almost a quarter of a century ago.

“See you at five” – a term coined during the crisis time, is being re-played like a broken record as speculation mounts that the ringgit will hit the unthinkable five handle to the dollar in future.

However, as we are aware, the ringgit is not to be entirely blamed for its weakness, as there are other factors that are playing out.

If one were to analyse carefully, the ringgit is in actual fact firmer against the Japanese yen by about 12.5%, up 7.2% and 7.1% against the British pound and the South Korean won respectively; between 0.9% and 3.8% higher against the Chinese yuan, Thai baht, Philippine peso and the euro. 

 

Other than the US dollar, the ringgit is only weaker against the Australian dollar, Indonesian rupiah, and the regional champion, the Singapore dollar by between 1.1% and 4.5%. 

 

Hence, overall, for the performance year-to-date, the ringgit may look like a weak currency as we are fixated on comparing the ringgit’s performance against the US dollar as well as the Singapore dollar, but in actual fact, the ringgit has outperformed at least seven other major and regional currencies.

The strength of the US dollar cannot be denied as the Federal Reserve (Fed) is battling hard against high inflation prints and is left with no choice but to raise the benchmark Fed fund rate (FFR).

Having raised 225 basis points or bps so far this year, the Fed is now poised to increase the FFR by another 75 bps in the September Federal Open Market Committee (FOMC) meeting next week, with odds of 100 bps too not being ruled out at all.

This was after the headline and core US inflation prints came in at 8.3% and 6.3%, and ahead of the market forecast of 8.1% and 6% respectively. Should the FOMC raise the FFR by 75 bps next week, the market is pricing in another 75-bps hike in the November meeting and a 50-bps increase in the December meeting.

This will take the FFR to 4.25%4.50% and bring the 2022 rate hikes to 425 bps. With the US 10-year treasuries at 3.43%, the yield spread between the Malaysian benchmark 10-year Malaysian Government Securities has narrowed to just 72 bps from 209 bps at the start of the year.

Indeed, the divergence in the monetary policy adopted by the Fed has a significant impact on the ringgit too.

Another key factor that the ringgit seems to be suffering is the correlation between the ringgit and the yuan. Both currencies removed the dollar-peg in July 2005, with Kuala Lumpur following suit right after Beijing’s move. Since then, the ringgit seems to have a high correlation with the yuan. 

Year-to-date, although the ringgit is up 0.9% against the yuan since the start of the year, the ringgit’s movement against yuan has been relatively flat over the past five years with the local currency down by 0.4% compared with a year ago, and 1.2% over the past five years.

The yuan has also been weaker against the US dollar, as the Chinese economy has not been doing well since China’s zero tolerance towards Covid-19 cases, which has resulted in major cities or regions going into short-term lockdowns. The yuan even hit a fresh two-year low, flirting with the seven handle against the US dollar.

Other factors too are playing out on the ringgit weakness, although we are fortunate that we continue to run a current account surplus, we have been running budget deficits for nearly a quarter of a century.

This has ballooned our federal government debt level to the extent that we have even moved the needle to ensure we remain within the redefined debt/gdp ratio.

Malaysia also has an over-dependence on foreign workers, which continues to weaken the ringgit with a high level of foreign remittances as well as a deficit in our services account and net outflows from primary income.

In addition, Malaysians investing abroad is another strain on the ringgit, while errors and omissions too can be a large contributor to the ringgit’s weakness as well.

As measuring a currency is all relative, it is understandable when the general public refers to the ringgit’s strength or weakness as “only” when compared with the US dollar and to a certain extent, the Singapore dollar.

Chart 1 shows the relative performance of the ringgit against the major global and regional currencies.

It can be seen that much of the weakness against the US dollar and the Singapore dollar occurred this year itself, while against the pound, euro, yen, won, baht and peso, the ringgit has been gaining ground not only year-to-date but also over the past year and five years.

Against the Australian dollar and rupiah, the ringgit has recouped its weakness against the two currencies with a stronger performance year-to-date.

While the picture looks respectable over the past five years, data going back over a 10-year and 15-year period, suggests that the ringgit has significantly underperformed.

Chart 2 shows the performance of the ringgit vis-à-vis the major global and regional currencies.

As seen in Chart 2, over a 10-year horizon, ie, from mid-september 2012 to the present, the ringgit is only firmer when compared with the yen (19.1%); Australian dollar (5.1%) and the rupiah (5%).

Against all the other currencies, the ringgit is weaker by between 6% against the pound to as much as 49.1% against the US dollar.

Over a 15-year horizon, the ringgit was also seen as weaker as it was down by between 4.5% against the yen and Australian dollar to as much as 40% against the Singapore dollar.

The ringgit is only firmer against the pound (25.6%); rupiah (18.1%); won (13.3%) and the euro (6.2%).

Another comparison is the performance of the ringgit since it was de-pegged on July 21, 2005.

Here one can observe that while the ringgit is down 41.3% since then against the yuan and 19.3% against the US dollar, it is firmer against other major currencies, rising by 1.9% against the euro, 6.4% against the yen and 21.3% against the pound.

Regionally, although the ringgit is up more than 20% against the rupiah, the ringgit is down significantly against other regional currencies.

This is sharpest against the Singapore dollar with about 42.7% depreciation, 35.7% against the baht, and 16.5% against the peso.

As currencies are valued on a relative basis by comparing one currency with another, an alternative approach is to look into the real effective exchange rate (REER) which takes into account the weighted average of a currency in relation to an index or a basket of other major currencies. The weights are based on comparing the relative trade balance of a currency against each country in the index.

REER data is provided by the Bank of International Settlement (BIS) monthly and Chart 3 summarises Malaysia’s REER performance since the de-pegging days, plotted against the US dollar.

The chart shows a highly correlated chart whereby the correlation was observed at -0.95, suggesting that REER has a significant impact on the value of the US dollar-ringgit exchange rate.

A tough question as the valuation of a currency is always seen as a relative point to another currency while the strength/weakness of one currency can also be attributed to the relative weakness/strength of another currency.

Nevertheless, if one were to gauge the REER as a reference point, the ringgit is effectively undervalued by approximately 16.8%, as a neutral REER should be at the 100.00 index point level.in

At this level, the ringgit’s fair value is approximately RM3.89 to the US dollar. However, the REER has always been trading below the 100 index point level, except for a brief occasion between April 2010 and August 2011; in February/march 2012; and between November 2012 and May 2013.

In July 2011, the ringgit traded at its post de-pegging high of RM2.9385 before succumbing to weakness due to multiple reasons.

Bank Negara’s international reserves begin to weaken from a peak of Us$141.4bil (or Rm435.5bil) as at May 2013 at a time when the ringgit was trading at RM3.08 to the dollar and the REER was at its peak of 104.11 points.

However, if one were to take the average REER of 93.34 points over the past 17 years, the ringgit has a fair value of RM4.17 to the dollar.

Hence, while the ringgit has weakened considerably against major currencies, especially since its de-pegging days, the local currency remains an undervalued currency by between 8.9% and 16.6%.

While the ringgit is seen as weak against the US dollar and Singapore dollar, it has outperformed against other major currencies like the euro, pound and yen.

Over the longer term, Malaysia needs to address the serious structural issues that have made us less competitive than our neighbours. Top of the list is education reforms which should be addressed quickly as we are losing out our young bright minds via migration.

One of Malaysia’s biggest losses is the brain drain that has benefitted many countries, especially Singapore, Australia and even as far as the United States.

The second issue that Malaysia needs to address is to attract right-minded high-skilled knowledge workers as well as the ability to attract the right investment dollars into Malaysia.

The spill-over effect from an investment-friendly country is multiple, as it can help to lift Malaysia’s competitiveness not only in traditional fields but new robust industries related to the technology and services industry.

Third, Malaysia needs to address the current low wage levels of Malaysians as we cannot be a high-income nation if 50% of Malaysians are earning less than RM2,100 per month.

There must be a concerted effort to increase wages, which will indirectly address not only the rising cost of living but increase the affordability as well as tax revenues of the government.

Fourth is our fight against corruption. It is a known fact that a low ranking in Transparency International’s Corruption Perception Index is highly correlated to the cost of doing business.

Malaysia needs to make greater efforts to weed out the corrupt practices, both in the government and in the private sector to enable Malaysia to be better position to not only attract the right global investors but to reduce the cost of public spending, which eventually leads to a lower cost to consumers.

Finally, it’s the politics and public policies that come with it. We must not only be investor friendly but must avoid flip-flopping policies that can cause serious irreparable damage to our reputation in the eyes of the world.

Public policies too must be cleverly crafted with the right inputs from all stakeholders to enable Malaysia to march forward as one.

Only then, we will see a stronger ringgit not only against the currencies that Malaysia has outperformed but also against the mighty US dollar and Singapore dollar

  by StarBizPANKAJ 4. KUMAR Source link

 

 Top stories

The Star 

US Inflation? The workforce is the bigger problem

 https://www.thestar.com.my/business/business-news/2022/09/17/inflation-the-workforce-is-the-bigger-problem

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Advisor Perspectives

US Inflation? The Workforce Is the Bigger Problem - Articles

 https://www.advisorperspectives.com/articles/2022/09/14/inflation-the-workforce-is-the-bigger-problem

 

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Call on the Government to downsize the country’s bloated civil service

Sheriff: ‘Government bureaucracy has grown so big that it’s not only taking up too much resources but creating many failures in our finance economy

KUALA LUMPUR: One of Malaysia’s former top civil servants has called on the Government to consider downsizing the country’s bloated civil service, while it still can.

Malaysia has the highest civil servants to population ratio in the Asia-Pacific, employing 1.6 million people or 11% of the country’s labour force.

And that could be a problem Malaysia may not be able to sustain if it runs into a financial crisis, said Tan Sri Mohd Sheriff Mohd Kassim, the former Finance Ministry secretary-general and Economic Planning Unit director-general.

He said if the Government was really set on keeping the national deficit at 3%, it needed to look at retrenching employees, particularly in the lower levels of the civil service, to cut spending.

“Government bureaucracy has grown so big that it’s not only taking up too much resources but creating many failures in our finance economy. There are just too many rules and regulations that the public and private sector have to live with,” he told a delegation of economists, politicians and government officials at the Malaysian Economic Association’s forum on public sector governance.

He advised Malaysia to begin downsizing the civil service, “better sooner than later” if it wanted to avoid running the risk of falling into a Greece-like crisis, where the European country had to cut salaries and was unable to pay pensions for its civil service.

Drawing examples from the recent Malaysia Airlines restructuring, where 6,000 people were retrenched, Mohd Sheriff said it was better to let staff go now and compensate them with retrenchment packages while the Government can still afford it.

“It may cost the Government a heavy expenditure now but it is worthwhile to do it now while we can still afford it and not until we are forced into a financial crisis like Greece.

“We don’t want to be in that situation. I think we should do it gradually. It is kinder to do it now with incentives than to suddenly cut their salaries and pensions at a time when they can least afford it,” he said.

Malaysia is expected to spend RM76bil in salaries and allowances for the civil service this year, on top of another RM21bil for pensions. Efficiency and corruption dominated talks on the civil service at the forum, held at Bank Negara’s Sasana Kijang.

Mohd Sheriff, who is also former president of the Malaysian Economic Association, said these issues have been around since his time in the civil service decades ago though not much has changed due to a lack of political will.

In jest, he suggested Malaysia emulate United States President Donald Trump’s idea on downsizing the US civil service by closing down two departments of the Government if it wanted to open another one.

He also suggested that Parliament create a committee to monitor the performance of top civil servants and give them the ability to retrench these officers if they fail to meet their marks.

“In many countries, even Indonesia, they have committees to hold Government leaders to any shortcomings on policy implementations and projects.

“These are the kinds of checks and balance we need to make our civil servants aware that they are being monitored for their work and they can be pulled out at any time,” he said.

Finance Minister II Datuk Johari Abdul Ghani had said Malaysia’s ratio of civil servants is one to 19.37 civilians and that the high number of Government staff had caused expenditures to balloon yearly.

As a comparison, the ratio in Indonesia is 1:110, in China it is 1:108, in Singapore it’s 1:71.4 and in South Korea the ratio is 1:50.

Despite this, Johari said there were no plans to reduce the number of civil servants.

By Nicholas Cheng The Star

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Performance culture lacking, Malaysian workers!

PETALING JAYA: Malaysian workers lack performance culture and generally spend half their working hours on matters unrelated to their job, said experts.

Leaderonomics chief executive officer Roshan Thiran said the laid-back working culture was partly to blame for the country’s low labour productivity.

“We tend to mix our working hours with bonding with colleagues and relationships whereas in other countries, working hours are made full use of,” he said.

He advised employees to perform self-audits to identify unproductive activities in the office that drained their working hours.

A check by The Star with several human resource practitioners revealed that Malaysian workers in general only spend four hours in a regular nine-to-five work period being productive.

Another two hours are spent on social networking sites or browsing through the Internet, whilst long lunches, cigarette breaks, tea breaks and office chatter make up for the other two hours.

Malaysian Employment Federation executive director Shamsuddin Bardan said our low productivity levels could drive away investors to neighbouring countries.

Shamsuddin said the unprofessional attitude among workers was in stark contrast to high-performance nations which encouraged a professional working culture with a focus on developing human capital.

“Some here have the ‘so long as I show up to work, it’s enough’ attitude, which shouldn’t be happening,” said Shamsuddin.

Human resource consultant Dr Asma Abdullah said Malaysian culture generally regarded the workplace as a social unit where work and social interaction mixed.

Meca Employers Consulting Agency executive director Dharmen Sivalingam said some employers had difficulties addressing their under-performing staff.

“Malaysian employers generally find it hard to converse with their employees on the matter of their productivity. It may be because they don’t want to be put in positions where they have to confront their subordinates,” he said.

Sivalingam also said workers in foreign countries were constantly under probation which keeps them performing at their best.

He said managers need to develop a proper key performance index system and see to it that employees understand how they are being assessed.

By NICHOLAS CHENG The Star/Asia News Network

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America, a "Generation of Sissies"

The “elephant in the room”— one big question in the minds of so many Americans is—“Why has the middle class in America lost so much ground, and when will it recover to earn better wages (and close the gap between the top earners and the middle class)?”   The answers are brutally simple:  ”Because America’s middle class became non-competitive globally,” and, “Not until American middle class workers—and the kind of work they do—become globally competitive again”   There are two huge problems facing the America in the future:  one is demographic, the other is cultural.

America (Photo credit: acb)

1)  “Baby Boomers” are retiring from the work force at the rate of 10,000 per day, and will do so for 17 years.  Most of them don’t have enough pension or 401(k) assets to support retirement for their life expectancy (15-20 years).  Too few employers will hire these older folks, with their potential problems of age—reduced stamina and more health-related problems (and higher health care costs).

2) In recent decades, American parents have raised a “Generation of Sissies”—of spoiled, lazy, pampered and over-rated youth—who are highly educated, but in things that the world doesn’t value very much (and thus won’t pay for).  The top 25% may be as good, as bright, as motivated as ever, and will likely be as successful as ever.   The vast majority of this generation consists of formally educated, but spoiled, soft post-adolescents, who will struggle to be self-sustaining as adults.  Because of this, they will not be able to support the massive wave of retired “Boomers,” who will be going broke in their later years.  In eras past, the elderly were supported by the coming younger generation(s).  Those days are gone.

Members of this “Generation of Sissies” have been the victims of being coddled, babied, pampered, misled, misguided, and under-educated so badly that their “take care of me” upbringing cannot be sustained as they move into adulthood.   The parents, who did this, also share in the responsibility for the failure of America’s educational system.

I won’t lay all the “blame” for these failures on American youth—although they have been willing accomplices.  Parents and educators failed to prepare them for adult life in the cold harsh world, and where they must compete for gainful employment.  Then the youth chose easy and fun majors in college; not the ones in that are in demand by employers.  Thus they can’t find jobs, or certainly not good paying jobs.

For too long, American parents have also abdicated the responsibilities for educating and raising their children to a cadre of teachers and educational institutions ill suited for the task at hand.  Parents used to prepare children to take care of themselves—sort of an apprenticeship in becoming an adult.  Along the way, they used to teach them, and demand of them, that they learn critical personal skills, and useful, responsible habits—like earning your own way in life.  Not any more.

Now, because of globalization the jobs have gone to wherever qualified workers will do them for the least pay.  American workers have fallen behind global competitors.  Thus, the American middle class, now and for the foreseeable future, will have to “play catch up” —learning new skills and how to apply them—and then employers will have to regain the work that provides the jobs.  Otherwise, the middle class will continue to languish with subpar wages—at least until it becomes competitive again, if that ever happens.  The only part of the middle class with growth prospects are employees of new, small businesses that grow–when they are not stifled by an oppressive government regulations.

Worse yet, is the untimeliness of this “Generation of Sissies,” who think that there are no winners or losers.  They learned this because everyone got rewarded just for participating. Trophies no longer represented hard work and winning to them.  Success meant just being involved and  “showing up”—and sometimes, not even that.  News flash for Americans of this Generation of Sissies: In the cold, harsh world of 21^st century global business there ARE winners and losers—and YOU are losing!

The “Generation of Sissies was victimized by too-busy parents, who abdicated their responsibilities, and tried to pass them off onto schools and teachers.  The teachers were not prepared to handle these new responsibilities.   Add to this the expectations that have been created: “free meals” (government funded, means “free”) that go far beyond the old school lunches; “free transportation” (or being driven to school);  “free extracurricular activities,” and much more.   And for this, all they had to do was“show up.”  Even grades are no longer a dose of reality.  Kinder words replace letter grades, to soften the truth of impending mediocrity.

Schools now teach “softer studies” (some of which used to be taught at home by parents) make up over 1/3 of total credits: “21st century life,” or “career-technical education, or “health, safety, & physical education,” or “visual & performing arts,” and “language arts literacy.”  Many students can’t write a grammatically correct sentence, and some don’t even see the point in learning to write (cursive) at all.  They use Text-messages and Tweets.   Signatures are nearly obsolete.

Schools still require a modicum of Math and Science, but not enough to meet todays employment demands.  In many cases, one 3-credit course (out of 110 credits) is offered on financial, economic, business, and entrepreneurial topics. Teachers are not held to the highest standards either, since doing so would require compensating the best ones more, and removing the worst ones—and teachers’ unions (and tenure) simply won’t allow that.  Today’s youth learn that being late, or absent isn’t so bad, because there is always an “excuse.”  But when they get in the world of work, employers expect employees to show up, on time, every day, and actually work all day.

Then parents pay a fortune (instead of putting it away for retirement) for college because it used to be a sure path to a decent job  (Now students graduate deeply in debt—over $1 Trillion and rising).  A degree in the arts or humanities may have once been the ticket to a job, but it’s not any more!   The youth of today and the adults of tomorrow simply have not been educated in the reality, the necessary skills and the knowledge they need to be competitive and self-sufficient.  Many do not have a clear understanding of how much hard work and  commitment they must invest to ensure their own future.

Too many people  feel sorry for these “underachievers,” even though part of the failure is their own fault.   The “Occupy movement” is filled with members of this “Generation of Sissies.”  They expect someone to “take care of them” and give them what they cannot or are unprepared to earn for themselves.   Who has what that they want?  The very people who worked hard to get a good education, studied, learned, applied themselves and learned to compete.


There will be negative comments about my title: “Generation of Sissies”—as being demeaning.  These comments will come mostly from the very same segment of society that helped create these problems—and still condones them.  To them I say, “Prove me wrong.”  Right now, the results confirm what I have written.  Until America puts the onus for education back onto the people where it belongs—first on youth and their parents, and next on quality schools and good teachers—the American middle class is doomed to remain stuck where it is.  Any other outcome is a delusion.

Can these problems be fixed?  Yes, but it took an entire generation or more to create them, so the fix will be slow and painful–as it is proving to be right now.   There is an even larger question.  It is not, ” WILL AMERICA COMPETE in the global economy of the 21^st century?  It is, “DO AMERICANS HAVE THE WILL TO COMPETE?   Will Americans take the necessary actions to make themselves and future generations competitive.  We can only hope that the answer to this question is YES!

By  John Mariotti, Forbes Contributor
John Mariotti is an internationally known executive and an award-winning author. His newest book, co-authored with D. M. Lukas, Hope is NOT a Strategy: Leadership Lessons from the Obama Presidency is available now at www.amazon.com  in paperback and Kindle, and in other e-book formats at www.smashwords.com 
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