Protesters in Nicosia, Cyprus' capital in 2013 after the EU suggested that a portion of deposits of Cypriots be "taxed" i.e. taken away to help to pay for the bail-out that the country required. Of course, Germany (and hence the Hitler treatment of Angela Merkel's photo) was the leading voice behind the suggested austerity measures. Photo from The Times UK.
T plus 119 - Cyprus
I've just spent a couple of days in Cyprus, on route to Turkey. And instead of posting pretty pictures, I thought I'd discuss the very interesting case of a little country with two economic systems. How did this happen? Well, the full history is rather convoluted, but the abridged version goes something like this:
The Greeks rightly claim to have been Cyprus' indigenous inhabitants for thousands of years. The island's position in the middle of the Mediterranean Sea has always held great commercial and military value; and in its long and turbulent history, Cyprus changed hands from the Mycenaeans (ancient Greeks) to the Persians, Romans, Arabs, Christian Crusaders, and the French. The Turks arrived in numbers when the Ottomans took over in the 16th century, forming a minority community which remains till this day. The British "liberated" Cyprus as an Ottoman economic backwater after WWI and granted it independence in 1960.
However, the Greek and Turkish communities never really got along and after a bloody period of armed conflict, it was finally decided by the UN in 1964 that Cyprus would be split in twain - the North for the Turkish community (37%) and the South for the Greek community (63%). Note that there was no talk of separate sovereignty at the time. It's actually remarkably similar to the Israel/Palestine situation which I wrote about earlier. Turkey invaded in 1974 and in 1983 unilaterally declared northern Cyprus to be independent, under the made-up name of The Turkish Republic of Northern Cyprus; which no other country recognises except Turkey. A period of instability followed, but south Cyprus i.e. the Republic of Cyprus was the one that gained greater economic prosperity in the following years, absent the economic sanctions levied on north Cyprus. In 2004, the Republic of Cyprus became part of the EU and in 2008 it adopted the Euro as its official currency.
Bad move.
Firstly, the adoption of the EU's neo-liberal values resulted in expensive state-sponsored socio-economic development; which the state could not afford. Second, the "liberalisation" of the banking sector (read: wanton over-development) led to a boom of easy credit fueled by deposits from Russian tax evaders. Sunny place for shady money indeed. Thirdly, it gave up all prospect of self-managed monetary policy, resulting it being shackled to the ball-and-chain that is the overvalued Euro. It is unable to devalue its currency to regain its competitiveness.
Having visited both south Cyprus and north Cyprus, I compared what I saw at both ends of the island and things are looking bleak for the supposedly more prosperous, better-managed South. The introduction of state-subsidised services e.g. in public transport has robbed the south of any entrepreneurship in this area. I had to wait an hour for an inter-city bus, with air con and seat belts of course, to make its scheduled stop. In the north, a rickety tin can driven by a toothless man roared up within 10 minutes. The euro, and the artificially high cost of living it imposes means that the south charges 50% more for every can of coke (EUR1.00) and twice as much for a meal (EUR10) than its northern neighbour. Hotel rooms too, cost 50% more in the south.
Why then, wouldn't tourists just go straight to the north? The beaches are the same; the medieval city-scapes are the same; and the Mediterranean climate is the same. And guess what, they're beginning to realise this. More bad news for the south then. From what I can see from the port cities of Girnes (north) and Limassol (south), the former is a bustling hive of activity while the latter is a ghost town haunted with shuttered shops and empty restaurants with sulky staff - the mimes of napkin-folding despair.
And if I'm being honest, the country needs to realise that it doesn't offer anything unique for tourists, vs its Mediterranean contemporaries. The beaches in Turkey or Lebanon are as good if not better. The clubbing/party scene in Beirut is light years ahead. The ancient monuments in any country within close proximity eclipse Cyprus' own in terms of scale and historical value. Given this scenario, the country must offer itself at a discount to its peers, not at a premium! And yet, it has the 8th highest minimum wage in the 27-member Euro area. For a country that relies on tourism as its most significant income-earner, it has just priced itself out of the competition. How crazy is that?
Ok, so how is this related to Malaysia?
Well, Cyprus' north-south divide and the contrast in their present-day competitiveness got me thinking about the "currency crisis" which Malaysia is facing today. The Ringgit has fallen about 20% from its previous steady state against the USD and people are panicking like its the end of the world. Is it? I'm not so sure. Is a weak Ringgit bad at this point in time? Let's examine the pros and cons.
Negatives: We feel poorer when visiting other countries. There is a risk of inflation. Businesses which import (and most SMEs are net importers) face higher costs. These are very real issues, make no mistake.
Positives: Exporters suddenly have a 20% price advantage. Tourists suddenly find our country 20% cheaper. Foreign investors suddenly realise that operating costs have come down by 20%.
Now, Malaysia is the world's 18th largest net-exporter. In other words, we're an export-driven economy. With global demand low and supply-side competition high, a price advantage is not a bad thing right now. It's the same for tourism - yes, Thailand has better beaches and Singapore has better shopping. But when tourists do the math, I'm betting that many will lean towards the more conservative side of the cost-benefit equation. Remember that their own disposable incomes have taken a hit in recent years too. And as for FDI e.g. in manufacturing, a double digit cost saving in a global paradigm of single digit margins makes a lot of sense. Yes, we've lost a lot of portfolio i.e. investment flows, but between hot money and money that is here-to-stay, I know which I'd prefer.
What about the "suffering" that Malaysians have to endure from this disgraceful devaluation? Well, first, let's put pride aside. We are too fixated on "1998" and "3.80". We need to drop these two concepts because they are meaningless today. We live in new times, with new challenges ahead of us. The more important question is, will there be hyperinflation? I don't think so. The majority of middle-class income is spent on servicing bank loans, which isn't affected at all, and the purchase of essential household items e.g. petrol, food etc. Most of these are price-controlled. Sure, we'll have to cut back on a few luxury items, but will that kill us? Our holidays abroad will be shortened from 10 days to 8 days. But it's no major sacrifice, really.
What concerns me more is the fate of our small businesses which import their raw material and sell locally. Their margins will be undoubtedly squeezed. And they employ 80% of the working population. But I argue that the devaluation of the Ringgit (fortunately) coincides with a multi-year low in commodity prices. Simple example: The chicken farmer pays 20% more for chicken feed, his highest variable cost; BUT it's still less than what he paid two years ago. Has the selling price of his chickens gone down? No. Can he survive this? I think yes. It's largely the same story for steel for developers and fertilizer for plantation owners, and so on. And I further argue that businesses in Malaysia are due for a round of cost-optimisation anyway, which will ultimately benefit them and the country in the long-run.
The much bigger problem is the uncertainty surrounding the drop. Businesses can cope with a drop; what they cannot cope with is not knowing how much further it will drop. In stabilising the Ringgit our policy-makers need to make some hard choices. They face what is known as the "Trilemma" i.e. an impossible trinity of policy positions which cannot occur simultaneously:
1. Stable exchange rate (which is what our businesses want)
2. Free capital flow (which is what the foreign investors want)
3. Stable interest rates (which is what the general population wants)
I think the market assumes that the Central Bank won't touch #3 because it would mean higher borrowing costs for consumers. So it is perhaps fearing the clamp-down on #2 which is exacerbating the problem. Plus of course certain political scandals, and the RMB devaluation aren't helping. But why shouldn't we touch #3? The Central Bank has only revised rates once, by 0.25% since May 2011. Central banks e.g. Denmark, Jordan which openly declare a currency peg or a managed float i.e. fixing #1 allow #3 to be (more or less) market-driven. Then they use foreign exchange reserves to mop up the difference. We seem to be hesitant in liberalising the former, and rapidly depleting the latter - reserves have dropped to USD95 bil from USD130 bil a year ago.
A revision in interest rates, even a small one, may signal to the markets that the Central Bank is ready to compromise on #3 and not resort to restricting #2. If we are confident that the country's fundamentals are strong, the impending US Fed hike is priced-in, and the Ringgit is intrinsically undervalued, the interest rates wouldn't move much at all. And it wouldn't affect the people a much as you'd think. The majority of people will have the option of extending the tenures on their loans rather than paying more monthly. And if the Government is really so concerned about a public outcry, a small reduction in GST could be seen as fair trade.
Let me be clear, I'm not advocating a peg to USD. But if the market is not confident about #2, and we won't move on #3, then the only variable which will move is #1. And presently it is moving in the wrong direction.
I've just spent a couple of days in Cyprus, on route to Turkey. And instead of posting pretty pictures, I thought I'd discuss the very interesting case of a little country with two economic systems. How did this happen? Well, the full history is rather convoluted, but the abridged version goes something like this:
The Greeks rightly claim to have been Cyprus' indigenous inhabitants for thousands of years. The island's position in the middle of the Mediterranean Sea has always held great commercial and military value; and in its long and turbulent history, Cyprus changed hands from the Mycenaeans (ancient Greeks) to the Persians, Romans, Arabs, Christian Crusaders, and the French. The Turks arrived in numbers when the Ottomans took over in the 16th century, forming a minority community which remains till this day. The British "liberated" Cyprus as an Ottoman economic backwater after WWI and granted it independence in 1960.
However, the Greek and Turkish communities never really got along and after a bloody period of armed conflict, it was finally decided by the UN in 1964 that Cyprus would be split in twain - the North for the Turkish community (37%) and the South for the Greek community (63%). Note that there was no talk of separate sovereignty at the time. It's actually remarkably similar to the Israel/Palestine situation which I wrote about earlier. Turkey invaded in 1974 and in 1983 unilaterally declared northern Cyprus to be independent, under the made-up name of The Turkish Republic of Northern Cyprus; which no other country recognises except Turkey. A period of instability followed, but south Cyprus i.e. the Republic of Cyprus was the one that gained greater economic prosperity in the following years, absent the economic sanctions levied on north Cyprus. In 2004, the Republic of Cyprus became part of the EU and in 2008 it adopted the Euro as its official currency.
Bad move.
Firstly, the adoption of the EU's neo-liberal values resulted in expensive state-sponsored socio-economic development; which the state could not afford. Second, the "liberalisation" of the banking sector (read: wanton over-development) led to a boom of easy credit fueled by deposits from Russian tax evaders. Sunny place for shady money indeed. Thirdly, it gave up all prospect of self-managed monetary policy, resulting it being shackled to the ball-and-chain that is the overvalued Euro. It is unable to devalue its currency to regain its competitiveness.
Having visited both south Cyprus and north Cyprus, I compared what I saw at both ends of the island and things are looking bleak for the supposedly more prosperous, better-managed South. The introduction of state-subsidised services e.g. in public transport has robbed the south of any entrepreneurship in this area. I had to wait an hour for an inter-city bus, with air con and seat belts of course, to make its scheduled stop. In the north, a rickety tin can driven by a toothless man roared up within 10 minutes. The euro, and the artificially high cost of living it imposes means that the south charges 50% more for every can of coke (EUR1.00) and twice as much for a meal (EUR10) than its northern neighbour. Hotel rooms too, cost 50% more in the south.
Why then, wouldn't tourists just go straight to the north? The beaches are the same; the medieval city-scapes are the same; and the Mediterranean climate is the same. And guess what, they're beginning to realise this. More bad news for the south then. From what I can see from the port cities of Girnes (north) and Limassol (south), the former is a bustling hive of activity while the latter is a ghost town haunted with shuttered shops and empty restaurants with sulky staff - the mimes of napkin-folding despair.
And if I'm being honest, the country needs to realise that it doesn't offer anything unique for tourists, vs its Mediterranean contemporaries. The beaches in Turkey or Lebanon are as good if not better. The clubbing/party scene in Beirut is light years ahead. The ancient monuments in any country within close proximity eclipse Cyprus' own in terms of scale and historical value. Given this scenario, the country must offer itself at a discount to its peers, not at a premium! And yet, it has the 8th highest minimum wage in the 27-member Euro area. For a country that relies on tourism as its most significant income-earner, it has just priced itself out of the competition. How crazy is that?
Ok, so how is this related to Malaysia?
Well, Cyprus' north-south divide and the contrast in their present-day competitiveness got me thinking about the "currency crisis" which Malaysia is facing today. The Ringgit has fallen about 20% from its previous steady state against the USD and people are panicking like its the end of the world. Is it? I'm not so sure. Is a weak Ringgit bad at this point in time? Let's examine the pros and cons.
Negatives: We feel poorer when visiting other countries. There is a risk of inflation. Businesses which import (and most SMEs are net importers) face higher costs. These are very real issues, make no mistake.
Positives: Exporters suddenly have a 20% price advantage. Tourists suddenly find our country 20% cheaper. Foreign investors suddenly realise that operating costs have come down by 20%.
Now, Malaysia is the world's 18th largest net-exporter. In other words, we're an export-driven economy. With global demand low and supply-side competition high, a price advantage is not a bad thing right now. It's the same for tourism - yes, Thailand has better beaches and Singapore has better shopping. But when tourists do the math, I'm betting that many will lean towards the more conservative side of the cost-benefit equation. Remember that their own disposable incomes have taken a hit in recent years too. And as for FDI e.g. in manufacturing, a double digit cost saving in a global paradigm of single digit margins makes a lot of sense. Yes, we've lost a lot of portfolio i.e. investment flows, but between hot money and money that is here-to-stay, I know which I'd prefer.
What about the "suffering" that Malaysians have to endure from this disgraceful devaluation? Well, first, let's put pride aside. We are too fixated on "1998" and "3.80". We need to drop these two concepts because they are meaningless today. We live in new times, with new challenges ahead of us. The more important question is, will there be hyperinflation? I don't think so. The majority of middle-class income is spent on servicing bank loans, which isn't affected at all, and the purchase of essential household items e.g. petrol, food etc. Most of these are price-controlled. Sure, we'll have to cut back on a few luxury items, but will that kill us? Our holidays abroad will be shortened from 10 days to 8 days. But it's no major sacrifice, really.
What concerns me more is the fate of our small businesses which import their raw material and sell locally. Their margins will be undoubtedly squeezed. And they employ 80% of the working population. But I argue that the devaluation of the Ringgit (fortunately) coincides with a multi-year low in commodity prices. Simple example: The chicken farmer pays 20% more for chicken feed, his highest variable cost; BUT it's still less than what he paid two years ago. Has the selling price of his chickens gone down? No. Can he survive this? I think yes. It's largely the same story for steel for developers and fertilizer for plantation owners, and so on. And I further argue that businesses in Malaysia are due for a round of cost-optimisation anyway, which will ultimately benefit them and the country in the long-run.
The much bigger problem is the uncertainty surrounding the drop. Businesses can cope with a drop; what they cannot cope with is not knowing how much further it will drop. In stabilising the Ringgit our policy-makers need to make some hard choices. They face what is known as the "Trilemma" i.e. an impossible trinity of policy positions which cannot occur simultaneously:
1. Stable exchange rate (which is what our businesses want)
2. Free capital flow (which is what the foreign investors want)
3. Stable interest rates (which is what the general population wants)
I think the market assumes that the Central Bank won't touch #3 because it would mean higher borrowing costs for consumers. So it is perhaps fearing the clamp-down on #2 which is exacerbating the problem. Plus of course certain political scandals, and the RMB devaluation aren't helping. But why shouldn't we touch #3? The Central Bank has only revised rates once, by 0.25% since May 2011. Central banks e.g. Denmark, Jordan which openly declare a currency peg or a managed float i.e. fixing #1 allow #3 to be (more or less) market-driven. Then they use foreign exchange reserves to mop up the difference. We seem to be hesitant in liberalising the former, and rapidly depleting the latter - reserves have dropped to USD95 bil from USD130 bil a year ago.
A revision in interest rates, even a small one, may signal to the markets that the Central Bank is ready to compromise on #3 and not resort to restricting #2. If we are confident that the country's fundamentals are strong, the impending US Fed hike is priced-in, and the Ringgit is intrinsically undervalued, the interest rates wouldn't move much at all. And it wouldn't affect the people a much as you'd think. The majority of people will have the option of extending the tenures on their loans rather than paying more monthly. And if the Government is really so concerned about a public outcry, a small reduction in GST could be seen as fair trade.
Let me be clear, I'm not advocating a peg to USD. But if the market is not confident about #2, and we won't move on #3, then the only variable which will move is #1. And presently it is moving in the wrong direction.
