Monday, June 23, 2008

Currency Freeze Had Saved Malaysia In The Short Term

The currency trap

There is a lot of talk these days of floating the region's local currencies. I have yet to come across someone knowledgeable in finance or economics who has not thought it is an excellent idea. Is it? I am not so sure.
There are two types of people who love the idea of de-pegging our local currencies to the US dollar. The first are those who are in it simply for greed: Once the currency floats, they can make a bundle of money playing currency market fluctuations by spotting gaps in demand and supply, filling it as the market demands.
The second type of people who would like to de-peg are the idealistic. Our sense of pride in our country and the sense of denigration at not being in control of our fiscal destiny is a powerful driver for such people.

I must admit that until I truly thought about it and considered the shock that our pride may bring to our economies if we de-peg, I fell into this category. Why we should not de-peg?
One of the greatest economical crises that we, people who have been financially active in the last past 20 years worldwide, faced was the 1997 Asian Financial crisis that took down the Asian Tigers.
This happened because these countries decided to focus their economies on exports to grow. They followed all the rules that economic growth dictated that they follow to achieve a sustainable high growth rate.
They aimed high and built like there was no tomorrow. Until the crash, they were the envy of the world.
Their secret to success was to keep on injecting their trade surplus into US dollars either through continuous trade with the US at ever higher rates year on year or through the purchase of US Government bonds. They also educated their people and encouraged national savings. So what happened?
Sadly success, if not tempered, breeds its own downfall. These economies had overvalued stock markets, extremely high property markets and a significant amount of foreign monies pushing these markets ever higher.
As property and stock prices kept rising, cautious and more seasoned investors started to think that the growth was not only unsustainable but worrying. Then the tipping point came and all hell broke loose.
Investors were abandoning these investments in droves. Some legitimately, others for more sinister reasons. Never discount the thought that some governments will sabotage others if they feel threatened.
The natural thing to do when you sell an asset in a different currency is to convert the money back into your own. This meant a great demand on the foreign currency while the local currency was dumped.
This led Malaysia to immediately freeze its currency float, much to the annoyance of the US, to protect its own economy after seeing what was happening to its neighbors.
It saved Malaysia in the short term but they were punished in the long term when the US returned its investments to other states while neglecting the Malaysian market.
We have nearly all the symptoms of the Asian Tigers - a great influx of foreign money into our stocks and property markets; a lively stock market; a white hot property market; double digit economic growth.
If we de-peg we will be asking for trouble. Imagine if liquidity is withdrawn in such a massive quantity from here; what would happen to our economy?
We like to think that we are immune and I am sure that the people in the Asian Tiger countries thought that they were as well.
The main difference was that they had a highly educated population and a good national savings scheme to see them through the crisis. We are just starting both.
Most people think that I am negative when I say or write things. I would too. However, as a businessman, I have learnt that the way to survive is to hope for the best, but plan for the worst.
Mishal Kanoo is the deputy chairman of the Kanoo Group. It is one of the largest family owned companies in the Gulf. The Kanoo family is the 11th richest in the Arab world with a fortune of US$6.1bn.

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