Are The Next Economy Crisis Coming? (Must Read)

United State (“US”) is the largest economy country in the world. Subsequently USD is the major international currency which used around the world widely. Since commodities around the world are priced in the USD, a strong currency in the United States is great for all commodity consumers around the world. A strong dollar makes commodities less expensive to import and hence lead to decrease in gold and also commodity raw material price such as steel, copper, zinc and aluminum. Commodity price is always inversely proportional to USD. It is same as crude oil price. One year ago, the crude oil price was still at the level of USD100/barrel but now it had dropped to USD38/barrel. Palm oil is also at the same category as crude oil; its price had also hit a new low. Being the only crude oil exporter in Southeast Asia, a big portion of Malaysia revenue is depending on crude oil.  When the crude oil price dropped, subsequently Malaysia income will be hit heavily! In other words, Malaysia is selling the same volume of crude oil out to other countries but it received much lesser money compared to last year. That’s the reason why Malaysia budget 2015 had been revised beginning of this year.

Malaysia main source of income is depending on export. Our country export is larger than import. So, after the export value minus import value, the remaining is what we called as surplus. Imagine you are doing export business in Malaysia, once you received USD from customers, what will you do? MYR is our principal currency and our daily expense including salary is also mainly in MYR. So, normally people will exchange with Bank Negara Malaysia (“BNM”) to convert back to MYR. The USD will be used as a fund by BNM and this is what we called as foreign currency reserve. When tourists visit to Malaysia, the USD currency they exchange will also contribute to the foreign currency reserve, same goes to foreign investment.

Back to the story, when the surplus is getting lower, automatically BNM reserve will be reduce. Money that doesn't have to be reserved at a bank is money that can be used to make new loans. Money that can be loaned out is money that can filter through the economy. So, when BNM reduce, MYR money supply will also reduce subsequently. It will affect bank borrowing since bank has left little money for lending. There are two signals that shown that bank money supply had decreased.

1) Did you receive any SMS from any banks that promote their fixed deposit rate? Normally, this only happens after BNM hikes the interest rate. However, in current situation, the bank is willing to increase its own interest rate to attract people to put their money in their bank.

2) There are some friends or relatives mentioned that their car loan / mortgage loan had been rejected. The bank had tightened their loan policy.

From these two points, we know that the bank no longer has enough money supply. Let’s think further, when most of the loans had been rejected, the sold out rate of property project will be highly reduce. It will affect the company corporate earnings. When the company doesn’t have enough funds on hand, their new project will be on hold or delay. The construction and industrial products such as cement, sand etc will be affected as well. This is a chain reaction that linked the whole economy!

The main income of bank depends on collecting interests from loan. When they no longer had enough money supply to lend out, their revenue earnings will drop. AMBANK is a very good example which hit by the economy.When our economy becomes less attractive and money supply drops, investors no longer interest to our country. In addition with the negative issues in politics, they had loss their confidence. Hence, foreign currency is pulling out very fast from Malaysia and lead to depreciation of MYR! FYI, our BNM International reserves was still at USD130+ billion on Jan 2014, but now it only left USD96.7 billion. Government no longer able to support our currency and hence they allow MYR to free falling. That’s the reason why USDMYR only took 2 weeks time to drop from 3.80 to 4.25. The worse case is Malaysia government and finance minister don’t have any method or idea to stop this. They don't even know what to do!

People tend to argue that weakening of MYR will attract foreign investors come to Malaysia again. Imagine if you are a foreign investor, will you still invest in Malaysia at this moment? In fact, they will wait for our currency to depreciate to a stable level before coming in. Our currency now is like a falling dagger, it drops without stop. Today, foreign fund had pulled out another MYR338m out from Malaysia stock market. It is a good example.

As a conclusion, as long as Malaysia internal problem couldn’t be solve, the bad cycle of economic will still continue going on. FYI, Malaysia stocks market had gone through 6 bull markets and 5 bear markets, either big or small one, since 1998. There were four times which caused by SARS, US Technology Bubble, US Subprime Crisis and Euro Sovereign Debt Crisis. In this 4 times, Malaysia economy was not hit but our stock market was indirectly affected. The biggest direct hit on Malaysia economy is during Asian Financial Crisis on 1998 and that was the most serious crisis in Malaysia stock market history! Please stop believing on those analysts or newspaper that mentioned Malaysia stock market will go up to the level of 1,800/1,900 by end of this year. Either we are heading towards World economic collapse or not, the stocks market no longer optimistic. So my dear friends, the journey will be tough and unpredictable. This will hit on all of us, regardless you are rich or poor. Of course, a crisis might be an opportunity too. All the very best to all of you

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