Thursday, 27 August 2015

Weak ringgit a concern but let's address it objectively


In reality economies throughout the Asia region and the rest of the developing world are suffering from currency devaluation against the US Dollar. The quantum of devaluation may vary from one country to the other but their respective currency has depreciated nevertheless.
Many economists are in agreeable that despite the daily “beatings” on their currencies andSTOCK MARKET, the countries are now more able to with stand the shock, thanks to the lessons learned from the 1997/1998 financial crisis.
There are three primary factors as opined by economists to be the reasons for the current currencies turmoil.
Since two decades ago economies throughout Asia and the rest of the developing world have become dependent on China for their exports, such as; minerals, energy resources, timber and other commodities.
China has had astronomical double digits economic growth for most of the years since 1998. Beginning 2003 the nation’s GDP stood at 10% and peaked at 14% in 2007 and thereon not far off 10% each and every year. Until lately, in 2012 China’s GDP slideto 7.7% and began to slide further to 7.4% in 2014.
China growth has slowed further this year with the expected achievement of 7% and as such, as a counter measure, the Chinese government has recent moved to devalue the Yuan.
The devaluation of Yuan has since inflicted pressures on and hence depreciating other currencies especially the nations that depend on China for their exports. Malaysia is of no exception.
On the other hand, over the last five years, while the Chinese economy has been getting weaker the US economy instead has been getting stronger. This results in the Chinese government no longer required to intervene in theCURRENCY MARKETto ensure weaker Yuan, while the nation continue to enjoy export boost with cheaper Yuan dictated by the market force.
The above observation supports the second hypothesis as to the reasons for the current currency turmoil worldwide, particularly the Asian region.
The US economy has since been expanding for several years now, and the Central Bank of United States is now looking into tightening its monitory policy by increasing the nation interest rates, which is zero rates now, in the coming months.
The foreseen increase in interest rate by the US government has mooted investors investing in this region to begin moving their investments to the US.
The moves have resulted in the sliding ofSTOCK MARKET PRICES as well as currency devaluation within the region. Malaysia too has not been spared to suffer from this investment migration to the US and hence its currency depreciation.
Conclusively, the devaluation of the Yuan and the soon to be implemented interest rate increment by the US government, are largely attributed to the current currency turmoil in the Asian region and the developing world.
In the case of Malaysia, the nation is further hit by the declining oil prices to the current level of about USD42 per barrel. The nation being a small oil producer the current price is simply uneconomical for export. This has resulted in higher devaluation of the Ringgit relative to non-oil production nations.
Understanding the currency devaluation phenomenon amongst the general public will ease the fear of its potential outcome. However, circulation of false news and opinions through the social media may elevate the public fear which is uncalled for. Instead positive perception and true analysis would be more helpful for the nation to ride the tide.
The current Ringgit depreciation is without doubt will have an impact on Malaysia industry, automotive inclusive. Various imported materials for parts productions will surely increase and are estimated to range between 8% and 20%.
It is commendable as to date the local automotive manufacturing community are able to bear the Ringgit depreciation. Perhaps they owe it to the lessons learnt from the 1998 financial crisis.
However, on the part of the government, monitoring on the impact of Ringgit depreciation on the automotive sector continues and measures are being debated should the situation necessitates for action.

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