Friday, April 8, 2011

Financial Development in Malaysia

Since the beginning of this year, a certain peculiar phenomenon in Malaysia's domestic monetary and financial sector has surfaced. Such a phenomenon is worth our effort to explore deeper. For example, in January this year, the deficit of Malaysia's food trade has already exceeded billions of ringgit and such an abnormal phenomenon only happened for the first time in recent years. Yet in the past few months, Malaysia's currency exchange rate as again the US dollar has continued to appreciate.

At this juncture, the ringgit exchange rate has reached the highest point of M$3.0255 as against the dollar. Moreover, in recent months, the supply volume of Malaysia's currency, from both micro and macro perspective, has significantly been on the rise. Bank loan, as compared with in the past, has obviously been on the increase too. Yet, in the financial market, the trend of both the short-term and long-term interest rate has seemed to be on the rise side by side. As for the local share market, the change is unpredictable.

International Factors

The beginning of this year witnessed the boom in share market with high stock-trading volume. However, since then, the Kuala Lumpur Stock Exchange Compose Index has already gone through many rounds of ups and downs. Some of the aforementioned peculiar phenomenon in the financial sector can be attributed to international factors.

However, if we explore deeper, we will discover the complex and complicated relationship amid such abnormalities. It also reflects that Malaysia's economy still carry with it some sickness that worth our attention.

Currency Exchange Rate

First, let us talk about the issuance of excess banknotes and paper money in the New Year by the Government authority. In principle, the issuance of excess paper money should be in response to the side of the demand. In other words, when the people in the society have the need to hold on to a certain amount of cash, then the financial institutions and the Central Bank of Malaysia (Bank Negara) should satisfy such a demand in a passive manner. Yet, if the general public all rush to the banks and withdraw cash, it will create a short-term shortage of bank deposit reserve and increase the volatility of short-term bank interest rate. Besides, if the Central Bank prints huge amount of new banknotes and paper money, it has to bear certain cost including the cost of transportation. In this regard, it is not an encouraged phenomenon for people to hold excess cash in hands. Modern and advanced countries have gradually become a cashless society. When the use of checks and credit cards has become more and more popular, the insurance of paper currency (or as compared with GNP) should gradually be reduced with the modernization process of the financial sector. But in Malaysia, the situation is quite the contrary.

If we trace the reason of why Malaysia will work against such a monetary trend, we can say that besides the fact that the use of credit cards and checks by the people on the streets is still not very popular, more importantly, the tendency of excessive private spending has continued to be on the increase in recent years. This, coupled with fact that shortly before and after the New Year, the local stock market did surge and the luxurious high expending consumer culture in Malaysia has intensified. Such a trend is most obvious in the younger generation and also in the share-holder group. The excessive surge in the issuance of cash is part and parcel of this over-consumption syndrome. In addition, all financial institutions have now set up large number of Automated Teller Machine (ATMs) across the country. These ATMs provide a more convenience way for the people to withdraw cash than in the past. This naturally leads to higher demand for the issuance of paper currency. However, it has also indirectly enhanced the temptation for consumers to spend more.

Second, let us talk about the change in Malaysian currency exchange rate. In the past two or three years, with Malaysia's trade surplus gradually been reduced, the surplus in the government's regular expenditure account has also drastically been reduced. This is especially so when the expenditure used to promote tourism industry has increased year after year. If we do not take into the account of the foreign exchange reserves in the Central Bank, Malaysian government's regular expenditure account has already shown a slight deficit figure. Such a situation reflects the softening of Malaysia's economic mechanism. On one hand, while the country's industrial production and export of commodities have slow down, but on the other hand, the services industries and consumer propensity to consume imported products have continued to expand. For example, in January this year, Malaysia's consumption figure has shown a rare deficit figure. The main reason is due to the substantial increase of the people's consumption on tobacco, alcohol, cosmetics and other imported goods. Under such a phenomenon, the Malaysian ringgit should logically be depreciated but this does not happen. In fact, in the past two or three years, the exchange rate of Malaysian ringgit as against US dollar has depreciated by about twenty cents and such a trend has more or less reflected the actual situation. However, since the second half of last year, Malaysia has opened and expanded the investment door for foreign investors to invest in Malaysia's stock market. With Malaysia's long term capital income drastically been improved, the amount of hot money that flows into the Kuala Lumpur share market has pushed the Malaysian currency from depreciation to appreciation. However, in the long run, such a phenomenon will inevitably undermine the competitiveness of Malaysia's commodity export market and lead to further deterioration of trade income. As such, at this moment, the Malaysian Government should not sit idly and continually allowing the Malaysian ringgit to value up.

Moreover, in the recent six months, Malaysia's annual increase rate for the supply of currency and the annual increase rate of bank loan interest have both risen from the bottom respectively. Logically, under the pressure of having more supply of currency than demand, the long term and short term interest rates should be tumbled down but in the actual situation, it is just the opposite. During the period before and after the New Year, the short-term bank interest rate has drastically gone up. For the public who have bought in the government's long-term bonds towards the end of last year, with the rise of long term interest rate, they find their money now trapped in the bonds. This is due mainly to the gradual recovery of the domestic economy. The trading volume in the local share market has also continued to expand. When there is a big demand for trading and speculative investment money; and when the supply of money becomes tight, there is the pressure for the bank interest rate to bounce up now.

Not too long ago, the US Federal Reserve Bureau has adopted a monetary tightening policy and adjusted the interest rate higher due to the rise in consumer prices. The monetary situation in Malaysia is quite similar to that of the United States. As such, it is not a surprise that the Central Bank of Malaysia has also adopted a monetary tightening policy and adjusted the bank interest rate to let it rise accordingly. In fact, Malaysia's financial deficit has continued to expand. Malaysia's financial deficit is expected to reach a 5.9 percent level. In this regard, the financial market in Malaysia will face more pressure in the coming days.

Economic Situation

Finally, if we talk about the change in the Kuala Lumpur stock market, we note that the change of its average earnings ratio is more than 30 times. Such a change in average earnings ratio is obviously on the high side. If we consider the fact that the savings rate of the citizens has gradually decreased year after year and that the dice provided by the share market has significantly been increased, then the space for the Malaysian share market to soar up again is indeed limited. Investors should adopt a cool attitude to keep watch of the temporary ups and downs in the local share market.

More than that is that we also hope that the Malaysian financial authority can take necessary measure at the appropriate time to curb the trend of share speculation in the stock market. Malaysia should also make effort to eliminate the unhealthy luxury consumption life style so that the country's economic and financial situation can resume normal operations as soon as possible.

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