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ON- SITE
ARTICLES
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OH NO!
INFLATION, POLITICAL UNCERTAINTY & SLOW DOWN IN THE ECONOMY
By John Ching, 24
-7-2008
Just
last week a journalist for a magazine contacted me for comments on the
effect the latest developments in the country have on potential MM2H
participants.
More specifically he was asking if the effects of the
increased food and fuel prices, political uncertainty – issue of leadership
for the country and slow down in the economy have spooked MM2H participants.
I told him my comments in brief but have decided to expand them into an
onsite article here as the issues he has raised are indeed interesting.
Looking at my clients I don’t think the potential MM2H participants are
as worried about the micro developments in Malaysia
right now as they are about the global outlook. The MM2H participants like
most look firstly for security and secondly for growth in this place they
call 2nd home.
I
think MM2H participants are more afraid of the effects of the housing slump,
sub-prime loan crisis and credit crunch in the US economy spilling over to
the real economy worldwide and of course worldwide inflation.
Sure
the recent fuel and food price increase of 40% and the corresponding
increase in almost every item is a problematic but it is not a unique
Malaysian phenomenon but is a global one. It doesn’t mean that
if a foreigner chooses not to move to Malaysia he can avoid the inflation.
Furthermore the effects of the increase in the local Consumer Price Index
are felt directly by Malaysians who are under the purview of the local
income per capita and earning the RM. Any increase in the local CPI is softer on a foreigner that does not make a living in Malaysia and
usually has his work and other income generating instruments overseas or in
a regional or global spread.
The
political order of the country has for the first time since independence
changed at the last election and the opposition now forms 37 % of the
parliament and some say this is instability. But by and large, MM2H
participants that hail from advanced countries, have 2 or 3-party political
systems at home anyway and therefore the lively debates of democracy is not
a novelty. Those that hail from autocratic countries, I suspect look at it
as an enlightening glimpse of government in action rather than worry.
Any
slowdown in the economy such as lower growth of GDP, slower manufacturing
export and construction figures do not directly affect people who are not
making a living in that particular place.
Although inflation, interest rates, currency exchange rates would.
INFLATION
In
this case inflation is a problem affecting all countries in the world at the
current moment. Inflation is at a 15 year highs in Saudi Arabia, a 14 year
high in Switzerland, 11 year high in the U.K., 10 year high in Japan
and the list goes on.
Rising
prices: Year-over-year global inflation rates as of July 2008. (Sources:
Reuters, Associated Press, International Monetary Fund, Bespoke Investment
Group)
The map above shows the
July 2007 to July 2008 increase of inflation figures of the major countries
of the world (www.cbc.ca). The figure for Malaysia for the roughly same
period (June 2007- June 2008) has just been released at the time of writing
and is 7.7%. This more than doubled the May 2007 - May 2008 figure of 3.8%
although the main reason for the rise was the fuel hike of 40% in June 2008.
According Kuala Lumpur
based fund managers, the estimated figure for say July 2007 – July 2008
should be above 7% but the rates for other countries would also rise in by then.
The
International Monetary Fund said that the rate of inflation for the top 70
economies is likely to breach the 5% mark by the 3rd quarter 2008 and that
it is on the advance in both emerging and developed nations.
An
important point is a lot of essential items such as fuel, food and
construction materials are controlled items in Malaysia as the government
regulates their prices and this will to a great extent control the upward
movement of the CPI.
Fuel for example is still subsidised by the government
although there was a 40% hike back in June. The
pump price for a litre of petrol is RM 2.70 when many economists put the
unsubsidised price at RM 4.50.
INTEREST RATES
The
interest rate is a consideration for MM2H participants as in most cases they
will have to deposit an amount of money in the fixed deposit in a local
bank. The chart below shows the interest rates of fixed deposit/time
deposits in various currencies as quoted by the website of HSBC in that
respective country. Criteria is an amount of approximately RM 300,000
|
COUNTRY |
% P.A. |
CRITERIA (12 MTHS) |
|
AUSTRALIA |
5.85 |
A$
100,000 – 249,000 |
|
U.K. |
4.93 |
GBP 50,000 – 99,000 |
|
KOREA |
5.20 |
WON (No min amt) |
|
MALAYSIA |
3.7 |
RM
0 – 1,000,000 |
|
USA |
1.75 |
USD 1000 up |
|
SINGAPORE |
1.08 |
S$
200,000 - $499,999 |
|
JAPAN |
0.44 |
YEN 10,000,000 |
Although the fixed deposit rate in Malaysia is not the most attractive in
the world, it can be considered to be in the medium range.
CURRENCY EXCHANGE
This
is a plus point for a MM2H participant that has transferred or is going to
transfer money to Malaysia. Below is the movement of the RM in relation to
other major currencies for the last 5 years (source www.finance.yahoo.com)
British Pound to Malaysian Ringgit
Exchange Rate

Euro to Malaysian Ringgit Exchange
Rate

Japanese Yen to Malaysian Ringgit
Exchange Rate

U.S. Dollar to Malaysian Ringgit
Exchange Rate

With
the exception of the Euro, the RM has been generally strengthening against
the GBP, YEN and USD in the last 5 years and it is set to appreciate some
more.
The
following report by Bernama early this month (July 2008) captures the
position of the RM nicely.
“The Malaysian Institute of
Economic Research (MIER) has suggested that the government relaxes existing
controls on the ringgit, especially on offshore trading.
Such a move will strengthen the local currency and ease the pain of
inflation, according to MIER executive director Professor Emeritus Datuk Dr
Mohamed Ariff Abdul Kareem.
“Imports would be cheaper while contributing to lower prices of goods. A
strong ringgit is also good as it is a plus factor for the stock market,” he
said.
Bank Negara Malaysia’s governor Tan Sri Dr Zeti Akhtar Aziz was quoted
recently as saying that Malaysia’s inflation last month probably exceeded
six per cent following the adjustment in fuel prices.
Zeti said domestic inflation was
expected to remain elevated for the rest of this year and in early 2009 but
should moderate in the second half of 2009.
According to Mohamed Ariff, Malaysia has limited policy options due to
budget deficits over the last 10 years.
“There is a sort of fiscal fatigue setting in. So, with the economic
slowdown, we have to consider another expansionary budget. This will again
make our budget deficits bigger, not smaller,” he said.
“As for interest rates, we cannot raise it too much as this would hurt the
economy. I think the only option left for the central bank is the exchange
rate,” Mohamed Ariff said.
“Thus, relaxation of controls would be helpful. The ringgit should be
allowed to appreciate on its own. We do not want it to appreciate
artificially, as this would be disastrous,” he said.
“We should give the market a little more leeway. Let the ringgit rise a bit.
I think it is still undervalued,” he added.
Mohamed Ariff pointed out that other currencies in the region were
appreciating more than the ringgit, vis-a-vis the US dollar.
Asked how much the ringgit should appreciate, he said: “I don’t think we
should decide on that. Leave it to the market forces. In times like this,
when deciding on the position of the ringgit, the risks are very limited.”
Mohamed Ariff said the ringgit is now facing a different situation from that
experienced during the Asian financial crisis.
“In 1997, the ringgit was over valued by more than 20 per cent. Today, it is
undervalued by about five per cent,” he said.
“The risks we face today are therefore very different. We don’t have to
worry about speculative attacks on the ringgit,” he added. — Bernama”
Kuala
Lumpur based economists I have spoken to today, estimate the RM to rise to
RM 3.1 to 1 USD at the end of this year and RM 2.9 to 1 USD early next year.
A rise
from the current RM 3.24/USD1 to say RM 2.9/USD1 would be an increase of 10%.
This roughly means MM2H participants that transfer money from a USD account
to Malaysia would stand to make 10% just from the currency exchange alone.
This plus say 3.7% of interest rate from 12 months local fixed-deposit
placement would add up to about 15% gain.
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