by Wan Saiful Wan Jan. First published in The Star 18 August 2015
Malaysians, especially those active on the cyberspace, are a versatile lot. When watching the English Football League, they become expert football pundits. When an airline disaster occur, they quickly pick up knowledge aerospace technology. When examining the Middle East crisis, they become foreign policy experts.
And now many have become economic experts. Just flick through facebook, twitter and instagram. You will immediately see so many people commenting on the falling ringgit and how we are heading towards doom.
But data actually says otherwise. It is a fact that our economic fundamentals are still pretty healthy.
The term ‘economic fundamentals’ is a broad name for many variables to measure the health of an economy. It can include measures such as unemployment rate, GDP growth rate, rate of taxation, inflation rate, current account balance, and more.
When we look at some of the data, Malaysia’s numbers look pretty healthy. Our GDP is growing at a healthy rate. Our unemployment rate is low. Our inflation rate is manageable. And our current account balance is acceptable.
But the issue that has attracted many “expert” opinion is the plunging value of our currency. The value of ringgit against US Dollar has been on a downward spiral and we have already breached the four ringgit mark.
In reality, just one indicator does not make an economic crisis. China for example has intentionally devalued their currency yet no one is shouting that China is heading towards an economic crisis. Instead many analysts suggested that they did it to make their economy more competitive by lowering their cost of exports.
The plunging ringgit has its positive and negative sides. When Tourism Minister Datuk Seri Nazri Aziz said that ringgit devaluation is good for the tourism industry, he is correct.
A cheaper ringgit means tourists from countries whose currencies are stronger would find Malaysian local products cheaper. Something that costs USD10 before may only cost USD8 now. So more of them could be attracted to come to Malaysia and spend.
To make it more personal, charities like ours also benefit from the drop in ringgit. We recently received a donation in British pound for our project to study school autonomy in Malaysia. We expected RM40,000. But we end up getting a bit over RM50,000. So in our small and rather specific case, the ringgit drop is good.
But of course there are downsides. Those who pay in foreign currencies will feel the pinch pretty hard. Parents with children studying overseas, university students purchasing textbooks from abroad, and businessmen importing materials from outside will all be affected.
We are affected too. For example, I am in the process of setting up another charitable foundation and the agent fee is in US dollar. I budgetted RM13,000 but now it has become more than RM16,000, which means I have to go begging again for more donation to help us out.
So please don’t get me wrong. I am not saying that the ringgit drop is good all around. Instead what I am saying is that it can have both good and bad impacts, depending on what you do and how involved you are with foreign currencies.
One thing that is clear, however, is that just one single indicator does not mean we are facing a financial crisis. As I said above, our economic fundamentals are still healthy. If we don’t tackle the plunging ringgit effectively then yes we may face a financial crisis in the near future. But at the moment we are not yet in a financial crisis.
There are many factors contributing to the falling ringgit. The drop in global oil price, the strengthening US dollar, and a drop in the level of confidence in government all play a role. But I am particularly worried about the last factor, the level of confidence in government.
I would go as far as saying that the government is facing a major crisis of confidence.
The trauma caused by the various changes that took place over the last few weeks have not subsided. Many are asking if key institutions in Malaysia can be trusted, and if there is any respect left for rule of law in this country.
The worse part is, the distrust is most widespread at the higher echelon of society. Those with money and those with power to make investment decisions feel that there are many questions still left unanswered. And when they act on their distrust, money leaves the country.
But on the good side, the government recognises this problem. The Prime Minister and his new cabinet have acknowledged the trust deficit in many speeches. And they are actively engaging the public with explanations.
In fact just last Friday I was invited to speak on a panel with the newly minted Deputy Finance Minister Datuk Johari Abdul Gani. He was on the ball with many good answers. Clearly his office prepared him well because they take the engagement seriously.
The effort has to continue. This will not be easy because the damage has been severe.
But there is no other choice. If the crisis of confidence is not addressed, we can only expect the economic repercussion to be very bad.
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Wan Saiful Wan Jan is chief executive of the Institute for Democracy and Economic Affairs (www.ideas.org.my)