The value of ringgit went down to the lowest point in the past 3 years during an aggressive sell-of across emerging-market assets. (Emerging markets are countries with social or business activity in the process of rapid growth and industrialization. Malaysia is part of the emerging markets.) By looking at the current trend, the value of ringgit will continue going lower – hence a higher USD exchange rate.
What happened to ringgit? The ringgit has declined 10% against the USD since end of May. This is due to worries over capital outflow from Malaysia’s government bond market to U.S. Treasury yields. U.S. Treasury yields are increasing and they appears to be more attractive for investors. (Bond yield is the percentage return that the investor will receive)
As you could notice from the chart, almost 50% of Malaysia government bonds are hold by foreigners. This is significantly higher compared to some of the other countries in Asia. If the foreigners decided to exit Malaysia bonds, it will cause the value of ringgit to go even lower.
Malaysia household debt is currently at 83% of gross domestic product. Earlier this month, Fitch Ratings (an international credit rating agency) downgraded its outlook on Malaysia from “stable” to “negative”. Both the high household debt and credit rating downgrade are factors that could trigger higher outflows from Malaysia bond market.
Indian rupee felt to a record low, the currency has weakened about 28% versus the dollar in the past two years. Thailand is in recession as domestic demand has been low and such trend is expected to continue Indonesian stocks have dropped about 20% since their peak and heading for bear market. A financial storm is directly above Asia. It is comparable to the 1997/98 Asian financial crisis.
During 1997/98 Asian financial crisis, Malaysia was hit extremely badly. Stock market dropped from 1,385 to 295 points while ringgit went down to as low as RM4.80 to US$1.00. At the peak of the crisis, interest rates went up to as high as 18%.
From a prudent employee to an active investor, everyone was hit during 1997/98 crisis. Property loan installment increased for both home owners and property investors, employees lost their jobs, businesses closed down, just to name a few. If you were old enough to sail through the 1997/98 financial, I’m sure you would agree that was nothing close to a pleasant experience and you wish you would never have to go through that again. Today 15 years later, are we going to see the same scenario again?
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz assured the public that Malaysia (being the 3rd largest economy in South-East Asia) has the strength and capability to manage the current volatility. Zeti said Malaysia has robust foreign exchange reserves level, which stood at US$137.9 billion (RM456.5 billion) and low levels of foreign-currency debt at around 1% to 2% of GDP.
However if for whatever reason in the coming months, BNM could not “manage” the financial volatility efficiently, expect higher interest rate. Interest for debts will be substantially higher. Property (especially high rise luxurious sub-sale sector) would have little or no demand as many middle class might start to lose jobs. Stock market will crash and cash will be king.
Holding cash alone is useless if you have no idea what to do with the cash. The easiest way to profit from financial crisis is through stock investment because of high liquidity. You can buy and sell a stock fairly quickly. Legendary stock investor Warren Buffet said “be fearful when others are greedy and be greedy when others are fearful”. Value Investing is something Buffet personally practices during stocks selection, find out more about Value Investing here: