Emerging Markets Conundrum

Suddenly we have emerging markets' currencies being whacked left right and centre. Suddenly we have a plethora of headlines and expert views on the situation. 

Where were all of them BEFORE? Including yours truly here ... most commentators will only comment on the situation AFTER it has presented itself. We will all try to sound masterly and professional when asked for our views ... which is why the financial industry is possibly the most over-rated, over-loaded with bullshit ... employing the most pathetic "hope-they-don't-find-out-how-average-I-am" souls on earth!

OK, now that thats off my chest, lets see if I can add some value add comments to the situation. My only qualification to comment is based on having ridden through bulls and bears from 87 till now, plus having lost sufficient money which hopefully translates to what we refer to as 'experience'.

Let's see if I can try to make more sense of the situation:

How did we get here?

a) wasn't really the EM's fault, you know ... I think its the Greenspan's keenness to print money in the early 2000s which started the whole thing (following the Internet crash),  even so, it was smallish compared to what happened later. 

b) its the bastardisation of currency ... that would seem to be the underlying crux of the whole thing. Following the subprime crisis, Bernanke had little choice but to print even more currency (unbacked mind you). The EU suffered too and difficulties in integrating the Euro with differing economic structure in each country caused imbalances. Coupled with the subprime fallout, even the ECB had follow suit and print more money, trying to delay the inevitable. Greece was an outlier but the excesses had been too much. As Spain, Italy and Portugal are still struggling with double digit unemployment, the ECB had to maintain the easy money policy.

c) Japan to the mix ... as if that is not enough currencies in the system, the new PM Abe started on its easy monetary policy as well

d) what you have now is the major developed countries printing a lot more currency, while the EM basically having to maintain a stable and low interest rate environment so that their currencies do not appreciate against the majors ... thus leading to massive asset reflation in stocks and properties in EM, and places where investors from EM would like to invest their funds (e.g. UK, Australian, Singapore and HK properties)

e) a slowing global economy ... just before the subprime crisis, a lot of funds had been invested in commodities, be it mines or oil exploration or renewable energy projects .. which continued somewhat even after the subprime crisis, and much of that investment was shelled out by EM.

f) so what's the EM's fault ... they did little wrong really. They had to maintain low rates, which caused local properties to zoom up. Maybe China and some countries over invested in resources and did not forsee how weak global economy was following 2008. Actually at best the global economy stuttered and slowed, stocks went up because of the massive liquidity in the system with nowhere to go ... same for properties.

g) the slowdown caused a glut in many commodities, oil was about the last one to crash ... which is why if you match the ringgit with Aussie dollar, we are about the same for the past 3 years.

h) commodities based currency, including Australia, Malaysia and Canada were hit very badly... Canada less so because their financial system were untouched by the subprime and their economy a bit more broad based. 

Hence the ringgit's weakness was largely caused by the sharp weakness in oil prices and palm oil. An unrelated factor was the political turmoil which exacerbated the whole situation. Now the black swan event, China's yuan devaluation.

China's move confirmed a few things: things are pretty bad in China, thus anyone trading with China will be affected; any country producing similar products as China will be affected ...

In conclusion: EM's faults lie in not moving up the value chain fast enough; not diversifying their economy sufficiently when things were good; not reforming their economy to meet global challenges ... But these are not crimes enough to whack EM currencies when the bulk of the problems were started and still maintained by the developed nations. EM just do not have the clout to determine their destinies ... which is also why we needed institutions such as IMF to help out nations in need. Capitalism is never fair.

So, what can Malaysia do. Let's not touch on politics. Let's look at economics and finance only. Looks like local rates will have to rise, banks will have to manage higher NPLs, property sector will be hit, stocks have been hit already and is in fact way oversold. Malaysia will have to keep spending locally, projects will have to continue. If we need to run a deficit for a few years, so be it. We need to keep domestic economy chugging while the world works out the realignment. We need to keep as many people in their jobs as possible. Jobs is the factor that could throw the whole economy into a tailspin - no jobs, no money to pay mortgage or car payments, defaults and more defaults, higher and higher interest rates to protect currency ... Hence, making sure jobs is around is very critical esp when we talk of our economy with very few safety nets.