Tuesday, December 31, 2013

Illegal Money outflow the cause of the weak Ringgit

What is Bank Negara doing while the Malaysian currency is sliding further down the slippery slope ?Last december 2012,, Global Financial Integrity (GFI) reported in its Washinton DC based study that from 2001 to 2010, a massive outflow of U.S $285.24 Billion (rm$860 billion) was channelled illegally out of the country.When this was widely reported and circulated by the local media, Bank Negara Governor, Zeti made a public declaration that this disclosure of massive illegal outflows would be investigated and a statement would be made in three months time. This was one year ago and Zeti has still maintained her elegant silence .

You dont have to be a rocket scientist or an expert economist to fathom that massive outflows of funds both legal and illegal source is the single contributing factor causing the decline in the country's valuation of its currency.In a reverse situation where massive injection of foreign funds for investment in industries and the investment in public listed equities,takes place, we see a noticeable appreciation of the country's currency.Conversely when there is an exit of foreign funds we see a weakeing of the local currency.If the country's financial system is not strong such imminent exit could cause havoc to the country's financial system as experienced in the 1998 financial meltdown .

In our present situation, if Global Financial Integrity's report of a massive outflow of rm$860 billion is true and accurate then this alone should suffice to cause a gradual decline in the value of the country's currency.This year alone we see a 10% decline of our currency against the us dollars from rm$3.00 to $3.30 and a 9.3% decline in our currency against the U.K pounds.

When massive amount of money is transferred out of the country to be converted to either U.S dollars or U.k pounds, the end result is that Malaysian dollars will end up in the holdings of foreign banks or if it is exchanged locally then it will caused a depletion of our foreign currency holdings..Either way it is a scenario that will cause a decline in the value of our currency..The Law of supply and demand will simply dictate the value of the currency.. When more currency exit the value will decline and vice versa..

Unless and until Bank Negara exert more stringent measure to curtail both legal and illegal outflow of funds from the financial system, the decline of our currency will continue unabated.For the time being, Bank negara should even discourage statutory bodies and private companies from investing overseas. Only when the decline is arrested can they consider allowing funds to be invested overseas.

No comments: