Malaysia in far better shape economically compared with 1998 Saturday, 11 July 2015 By: JAGDEV SINGH . . . MAKING A POINT

by **Cals** Sat 11 Jul 2015, 21:47

Malaysia in far better shape economically compared with 1998

Saturday, 11 July 2015
By: JAGDEV SINGH . . . MAKING A POINT

IT was 10 years ago in July 2005 that the ringgit’s peg of RM3.80 against the US dollar, a capital control remnant from the Asian financial crisis, was lifted.
Today, it’s back at around the same level after slipping below that psychological threshold that Malaysians had been accustomed to for many years after the economic crisis ended.
It’s like the ringgit has come full circle, returning to the point when the currency was pegged against the dollar during the darkest economic days of 1998.
The conditions today, though, couldn’t be different than in 1998, and the two major contrasts then and now is the type of crisis.
In 1998, Malaysia was in the throes of a full-blown economic crisis.
The stock market index, prior to the pegging of the ringgit, was just below the 280-point level.
Confidence in the economy was shot and the economy was shrinking, and many people were genuinely worried about their jobs and the financial stability of the country.
It was a tangible crisis that saw the destruction of wealth not seen since.
There was also a political crisis involving the then Prime Minister Tun Dr Mahathir Mohamad and his deputy Datuk Seri Anwar Ibrahim. Anwar was sacked and coupled with the terrible economic worries, there was a “twin deficit” crisis.
Corporates such as Renong Bhd were such huge debtors to the financial system and posed a big risk that a bailout of the politically-linked company was needed to shore up confidence.
Companies were bleeding red ink and the losses were overwhelming for many. Debt restructuring was a feature in the corporate scene and agencies were formed to handle the restructuring of corporate debt and recapitalise the banks.
Today, the issues surrounding 1Malaysia Development Bhd (1MDB) and the ongoing investigations into the alleged money transfers involving Prime Minister Datuk Seri Najib Tun Razak can count as a political crisis. The 1MDB issue has been brewing for some time, and how it will be resolved is not yet known.
The damage to the economy involving 1MDB is small in comparison with the problems of 1998, when Renong was a larger debtor on percentage terms of total outstanding debt in the economy.
Economically, Malaysia is in far better shape compared with 1998.
The economy is growing at around 5%, the fiscal position is improving, corporate debt is way less than it was in 1998 and companies are making healthy profits, just the growth of which is slowing.
There are no twin deficits like there was before the Asian financial crisis, although the fiscal position could be better. At least, the trajectory is for the fiscal deficit to fall in the coming years.
Banks today are far better capitalised and stronger than they were in 1998.
Bank Negara, in its decision, to keep interest rates stable on Thursday hints of weakness in economic growth in the second quarter.
A slowdown is expected, as consumption is a big driver of the economy.
With the goods and services tax introduced from April, the consumption tax has pushed prices up, some will say by much more than the 6% rate of the tax, and people have had to make adjustments.
Higher costs mean people have to figure out how to budget their expenses and that will have an impact on consumption.
These cost pressures are no where near the economic problems of 1998 when the drop in the ringgit’s value, high interest rates and loss in equity value in the stock market made things tough for many people.
Externally, though, the problems of China and Europe pose a challenge for emerging economies like Malaysia, but the spillover of any damage from the turmoil in Greece and the slowdown in China’s economy cannot yet be quantified for Malaysia.
The issue now is whether the political crisis will translate into an economic one. I don’t see that happening, as the feel on the ground is vastly different than what it was in 1998.
The weak ringgit can hurt investments and spending and it will be interesting to see what happens next.
There will be foreign investors who will see the battered-down ringgit as a good buy and one thing is for sure: as soon as the “political crisis” is resolved, the ringgit will surely go back to its fair value, which is certainly not at the level when it was pegged in 1998. The economy is in far better shape than back then.