Malaysia: Much Loved No More

While we were on festive holiday, the news that Moody's may downgrade Malaysia to junk status quickly reminded us of the rot in our midst: the 1MDB mess and the donation-gate affair. This Moody's story was picked up by the Star newspaper as well as Malaysian Insider. The Malaysian Insider commented:

Two weeks after the Latin American country’s credit rating was lowered, CDS investors are punishing other emerging markets facing similar challenges, sending their implied sovereign ratings at least five levels below their official grades, according to data from Moody’s Corp.
Malaysia is A3 at the company, though traders see it six levels lower at Ba3. South Africa, which is a Baa2, is viewed as a B1 borrower. Three Aa3 nations, including China, are perceived by the markets as deserving the lowest investment grade.
- See more at: http://www.themalaysianinsider.com/malaysia/article/malaysia-deserves-junk-status-like-brazil-says-moodys#sthash.7lrLTR4m.dpuf

Two weeks after the Latin American country’s credit rating was lowered, CDS investors are punishing other emerging markets facing similar challenges, sending their implied sovereign ratings at least five levels below their official grades, according to data from Moody’s Corp. 

Malaysia is A3 at the company, though traders see it six levels lower at Ba3. South Africa, which is a Baa2, is viewed as a B1 borrower. Three Aa3 nations, including China, are perceived by the markets as deserving the lowest investment grade.

The Star highlighted an instagram post by CIMB Group chairman Datuk Seri Nazir Razak (see below).
 

via the Star

The MYR weakened almost immediately. It made a high of 3.1095 against SGD before easing back to 3.0853. Against USD, it made a high of 4.446 before pulling back to 4.380. Chartwise, our USD-MYR & SGD-MYR are on the verge of breaking to the upside of their respective "flag/pennant" formation. If these happen, then USD-MYR & SGD-MYR would continue in the prior uptrend.

 
 Chart: USD-MYR & SGD-MYR's weekly chart as at Sep 24, 2015 (Source: XE.com)

This reminded me of my visit to my mechanic 2 days earlier. I was surprised by his overflowing inventory which exceeded the limited space in his store and was lying everywhere in his workshop. Sensing my curiosity, my mechanic explained that the prices of spare parts have been soaring. To avoid unpleasant surprises and customer's complaints, he resorted to buying ahead. Hence, his overflowing inventory. I quickly reminded him that he should give me the old prices for my new parts.

This episode reinforced a lesson from Economics 101. That's we are on the verge of an inflationary spiral. The first leg of this economic phenomenon is when the traders would buy ahead to secure lower priced goods. In the next stage the traders would wise up and start to hoard these goods in order to secure abnormal profit. When inflation expectation is built into our psychology, all economics players must act to protect themselves. Workers would ask for 2-3 times higher increment in order not to lose out. And, around and around we go. Malaysia will start to lose our competitive edge and our industry will suffer. We are getting ourselves into a slippery slope.

The time has come for Malaysians to bite the bullet. We have 2 stark choices: We can either tackle the 1MDB & Donation-gate mess head-on or implement a stop-gap measure in the form of capital control. Frankly, I don't see why we should go down the road of having capital control again. I also don't see why the whole country has to suffer for the mistake of a few men. I hope that these men - our so-called leaders - will face up to the responsibilities of leadership & the trust that is placed upon them. They must learn 2 important lessons of leadership: taking responsibility for one's action & making personal sacrifices for the good of the nation. I hope that they find the strength to do these quickly.