Anwar’s first real crisis as PM

Falling Ringgit and economy will be a true test

Over the last month there has been a lot of chatter over the state of the economy. The cost of living, lacklustre Bursa, EPF, and rise in interest rates have all been topics of contention.

The Ringgit has fallen from 4.60 to 4.68 over the month of June. Last November the Ringgit reached 4.7 against the USD, but rose to 4.24 in January. For the last 4 years, the Ringgit has been ranging between 4.00 and 4.20. Anwar became prime minister at 4.40.

However, the Ringgit is now falling below what has been psychologically acceptable. When the Bank Negara Malaysia (BNM) raised the OPR to 3.0%, most economists felt this would stabilize the Ringgit, especially when the US Federal Reserve Bank hinted it would not raise US interest rates for a while. However, the Ringgit is still drifting on a downward trend, to the point where the BNM may feel compelled to raise the OPR to 3.25%.

Any interest rate rise would be devastating to both businesses and households. The last rate rise moved bank base lending rates to 6.47-6.70%. That increased repayments of mortgages and business loans by 13.5%, straining household budgets and rising the cost of doing business. This is far about the official inflation rate for May 2023, at 2.8%.

The conventional wisdom for the BNM board is to follow up with another rate rise in an attempt to steady the fall of the Ringgit. However, such a move would be devastating upon both business and households.

Malaysia is now in an economic situation where there is an economic policy vacuum. The BNM board is relatively new and the Anwar administration advisors are also new. There is an unprecedented mix of economic indicators where monetary and fiscal policy must be applied correctly to alleviate the situation. Correcting the economy will take skill that hasn’t been seen yet. Malaysia needs a philosophical approach to economics, or economist creative enough to develop a remedy.

Anwar’s first test

Anwar now faces an economy with a very challenging set of attributes to deal with.

As expected, the international economy is taking a deep drive, with China also beginning to become sluggish. China is Malaysia’s largest trading partner, and Malaysia needs strong exports after April’s year on year exports fell 17.4%. Capital outflow is likely to keep increasing as investors look for more stable exchange rates in other markets. This is likely to keep downward pressure on the Ringgit.

As the Ringgit keeps falling, the cost of repaying external government debt will increase, thus increasing the deficit. This is going to increase imported inflation.

A strong electoral win in the state elections by Perikatan Nasional will give the appearance of political instability. The very discussion of political instability by political analysts and news portals could psychologically spook investors into believing there is real political instability, when the federal government still has a very comfortable majority in the Dewan Rakyat. There is danger talk can become a self-fulfilling prophecy.

During the 1998/99 Asian financial crisis, then prime minister Mahathir Mohamed and members of his cabinet talked up the economy on a daily basis. Mahathir eventually pegged the Ringgit at RM 3.80 to the USD. This protected Malaysia’s from external inflation over the period of the Asian financial crisis.

This was a move Anwar opposed at the time, and still opposes today. In contrast to 1998, the Anwar administration is not talking much about the economy, reassuring people, which can allow fear and panic to enter into sentiment. This is dangerous, and Anwar must start talking up the Ringgit.

The psychological barrier could be 4.7, 4.8, or 4.9. If the Ringgit hits any of those levels, it will bring pessimism to the economy. Anwar has a good international reputation and must use it to woo international confidence in the Ringgit. This hasn’t been done, and its now time to do it.

Anwar is now in his first real crisis as prime minister. The buck stops with Anwar, as he didn’t appoint anyone to take the finance minister job. Many other national leaders use this duet (PM and FM) to their advantage. Anwar doesn’t have that advantage at present, and it might be time to appoint a very competent and respected economist as finance minister. This would give people the perception there is someone fulltime looking at the problem. A prime minister can only be a part time finance minister, and Malaysia needs a fulltime finance minister, heading into crisis.

With a separate finance minister, Anwar would have the luxury of being able to throw the problem at his new finance minister.

Malaysia has a national problem. There are no super-economists among the political elite. The think tanks have all seemed to run for the hills, and even the chairman of BNM is mostly silent.

With the Ringgit at 4.68, Anwar by default is alone, as all his advisors are in the backrooms somewhere, and are not facing the public with explanations and plans to fix Malaysia’s economy.

However, if Anwar comes through, this will be his ‘Churchill’ moment, if he comes up with a solution.

The current Malaysian economic scenario really needs the nation’s best and brightest economists to sit down together and develop a very quick plan or action. Not in August, but in the next week. At least some talking points. The Anwar administration must be seen to be in control. That’s half the solution.

Originally published in FMT 26th June 2023

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