Serious questions need to be asked — for what and for who the rate hikes were aimed at?
Our central bankers made that mistake many years ago, specifically in 1997/1998. To be fair, it was a contagion upon the central banks of the region as all were responding similarly then. The devaluation of the Thai baht in mid-1997, initiated by currency speculators, triggered a text-book response from regional banks that brought most of the East Asian Economic Tigers — Thailand, Indonesia, South Korea and, very nearly, Malaysia — to their knees.
The main reason was that the economists then refused to acknowledge the real problem — speculators making a killing by betting short against regional currencies versus the US dollar (USD) — but instead chose to follow the basic solution against currency slump as proposed by the so-called experts at the World Bank and International Monetary Fund (IMF).
The then MD of IMF, Michel Camdessus, was infamously quoted as saying that interest rates have to be raised to make domestic currencies more attractive to be held, even if it hurts weak banks and corporations.
This despite the currency traders continuing to make a killing with short bets. This despite the obvious — that interest rates increase as a panacea didn’t make any headway to improve the situation.
It did not merely hurt banks and corporations, as the economy of the whole East Asian region — Thailand, South Korea, Malaysia, Indonesia and the Philippines included — crashed.
The Indonesian government collapsed, tens of millions of its people lost their job, many more displaced and plunged into poverty. IMF — while giving aid to the region’s largest nation — forced President Suharto to accede ownership of corporations and government-owned-companies to foreigners at fire-sale prices. Its economy took nearly one and a half decade to fully recover from the impact.
South Koreans fared a bit better as they immediately went into war-recovery mode by having a nationwide fundraising to pay off the national debt — but its people lost millions of jobs and their giant conglomerates were broken up and sold off for a song. One of their biggest chaebols, Daewoo, was bought out by the Americans and until now remains a shadow of its prime.
Malaysia struggled badly as almost all economic activities ground to a halt, the stock market tanked and interest rate shot through the roof. By May 1998, the effective base lending rate (BLR) in Kuala Lumpur reached an all-time-high of 13.53%, more than 750 basis points (bps) higher from the 1996 average.
Half-way through the IMF recommendations, however, the Malaysian government wised up, sacked the Bank Negara Malaysia (BNM) governor and the finance minister, and took the unorthodox action to ring-fence the ringgit by pegging it to the USD and limiting its international circulation. The rest is history.
Fast forward to 2022.
On Nov 3, while the whole nation was high on politics with the impending general election, the Monetary Policy Committee (MPC) of BNM, for the fourth time this year, increased the Overnight Policy Rate (OPR) yet again by another 25bps to 2.75%.
The increase is moderate, but the central bank is clearly tracing the aggressive moves by the US Federal Reserve (Fed) in raising interest rates, by 375bps within eight months, to stem inflation in the US, but has inadvertently itself been accused of exporting inflation to the rest of the world.
BNM has repeatedly stated its policy to use OPR and, inherently, the interest rate as the main tool to, one, cool down inflationary pressures, and two, manage the slide of the ringgit which has been slipping to record lows of late.
There are major problems with both scenarios.
One, inflation is not abating as the main reason for its steaming up is not because of demand (which would have been effectively cooled by raising interest rates), but it is being driven by global supply disruption. The Ukraine war practically threw a spanner into the global food supply wheels made worse by economic sanctions against Russia. Both countries collectively account for over a quarter of global wheat and 15% of world corn supply. And Russia, as one of the biggest energy suppliers, provides 14% of global crude oil and 9% of global natural gas.
Scenario two, ringgit by no means is getting any stronger. Prior to the MPC raising rates in May 2022, the local currency was trading at RM4.1945 to the dollar. After the fourth OPR adjustment, it was quoted at RM4.7420 to the dollar, a decline of more than 13%, not to mention touching the lowest rate ever in the modern history of the Malaysian economy at RM4.7485 on Nov 8.
If the MPC’s dual primary reasons in increasing the OPR were an abject failure as both inflation and ringgit are not responding accordingly, why the dogged persistence to continue?
Who are the benefactors? Who else other than the banks would see their interest margin improve?
The reality on the ground is, the people on the street, and the small and medium enterprises (SMEs) still reeling from the direct consequences of the two-year-long Covid-19 lockdowns, are hit hard by the sharp upturn in mortgage payments and business loans. One can keep arguing that the current rate is still accommodative as recent hikes were gradual and made against the lowest rate ever, but it is entirely academic. Granted, that up to May 9, the OPR was held at its lowest rate of 1.75% before being gradually increased, but the fact remains that the current payment rate is substantially more expensive than it was six months ago.
A recent survey by Associated Chinese Chambers of Commerce & Industry Malaysia (ACCCIM) revealed that due to the OPR increases and expected increases, its SME members are holding back expansion plans for 2022’s remaining months and 2023. This is coming from the SMEs, the sector which employs more than 7.5 million workers or nearly half (48%) of the entire Malaysian workforce.
And Malaysians should not be too excited with the GDP increase of 14.2% in the previous financial quarter (3Q22), as it was still on the back of the 2020/2021’s limp economic performance and the fact that part of the growth was propped up by the RM145b Employees Provident Fund’s withdrawals related to Covid-19. The EPF contributors are literally supporting the country’s economy with their own money.
Even in the US, economists are now warning the Fed that the currently rampant price inflation is generally spurred by rising profit margin and not due to rising wages. Their aggressive rate increases, therefore, will achieve very little in taming spiking prices. A situation not too dissimilar to the local scenario.
The caretaker government may allude to the fact that they do not intervene in OPR decisions, as repercussions coming from the electorates could be damaging. However, serious questions need to be asked — for what and for who the rate hikes were aimed at?
Solutions need to be independent and sound, but considerations should not be made in vacuum.
Asuki Abas is the editor at The Malaysian Reserve.
This article first appeared in The Malaysian Reserve weekly print edition