Strength of reserves will help country defend against currency attacks

This is done via the forward and futures contract in the currency swap market and for Malaysia and Thailand, the two central banks have been carrying out two distinct market operations.

In Thailand’s case, the Bank of Thailand has been on a net long position while Bank Nergara’s operations suggests it is in a net short position for its forward contracts. In fact, we were not very much involved in forward operations until about 2015 (right about the time when our reserves were deteriorating due to outflow of funds when the Ringgit weakened due to two main factors – drop in oil prices and the 1MDB issue).

Since then, Bank Negara’s net short position widened and the latest figure as at end of November 2019 showed that the current net short position stood at Us$13.7bil.

If we were to net off these long/short positions of the two central banks, the results show a significant increase in Thailand’s net reserves while Malaysia’s net reserves showed we are now just below Us$90bil. In percentage terms, Thailand saw its net reserves rose a staggering 36% while Malaysia’s net reserves dropped 23% between 2014 and 2019.

The strength of the reserves will enable the nation to defend itself not only if there is an attack on its currency but as a buffer in times of economic uncertainty as there are two key components of that reserves are actually the number of months the reserve is able to sustain retained imports and to service its short term external debts, which is summarised in Table 4.

From Table 4, we can see that Thailand has indeed a strong buffer to defend its currency should there be another attack on it, especially when the situation arises where emerging market currencies are grouped together as one. In the past, we have seen this happening when currencies come under pressure due to weakness in reserves or current account deficits that persist over a period of time. Table 5 also shows that Thailand has not only a superior current account surplus but a growing surplus and this strength, when measured against the GDP, shows that Thailand’s current surplus is effectively more than three times of Malaysia’s surplus. It is not to say that Malaysia’s surplus is insufficient but rather our northern neighbour has a superior surplus than we do.

How did Thailand generate such significant increase in its current account surplus? Text book tells us that current account is simply the difference between what a nation earns from it receives via exports of goods and services, income from overseas investments or remittances it received and what it pays for imports of goods and services, repatriation by foreign investors’ income from the country and outgoings in terms of remittances.

Table 6 summarises Thailand and Malaysia’s trade balance as well as the services and net balance from remittances and transfers to/from each country. This is the key. Malaysia, while is competitive in generating significant trade balance as how Thailand is able to, it is the deficit that we have in all three other segments that is not helping us to show a much better current account surplus, which in turn could see our ringgit regaining its glory days. Thailand on the hand, enjoys not only a strong trade balance but also a surplus in its services sector and primary and secondary income sources.

> What can Malaysia do to reverse the ringgit’s fortunes? Indeed, the drag that Malaysia is experiencing on its current account surplus is mainly derived from services sector, the primary and the secondary income sources. From the above data, we need more effort to:

Encourage our Malaysian companies to repatriate income earned overseas;

Potentially find ways to encourage foreign companies in Malaysia to re-invest their investment income into the country instead of remitting them back to their home countries. This is in actual fact one of the largest sources of primary income deficit at Rm43.9bil in 2018 and accounting for more than 80% of primary income deficit that is earned in Malaysia, which is subsequently repatriated to the owners of capital in the form of dividends.

Plug the leakages in overseas remittances not only among Malaysians but also foreign workers (both legal and illegal) who repatriate income earned from the country.

These are not easy measures to implement but we need to think ways to keep ringgit that is earned in Malaysia to be translated into new capital or domestic consumption and not repatriated overseas and draining our surpluses, adding pressure to the ringgit as well as on our reserves.

Hopefully, if we can address the shortcomings in managing our finances, we will soon be able to see the ringgit returning to its near 10:1 ratio with the THB and perhaps much better than a third of the value that we get when we are in Singapore. Until that happens, we will be kept wondering where to go other than to Visit Malaysia (yes, it’s this year) and to spend our ringgit.

(Note: I would like to thank Suraya Zainudin, who has a personal finance website at https:// ringgitohringgit.com/ for allowing me to use her website’s name for this week’s title.

The views expressed here are the writer’s own.