Personal DEBT Time Bomb

The Ringgit Malaysia has been consistently losing its value as of this writings date.

How much has the ringgit fallen?

Before closing on 3 December 2014, the ringgit dropped to as far as 3.4455 to the US dollar – the weakest it had been since February 2010.

In the first quarter of 2015, the ringgit’s value continued to weaken. 

On 11 March 2015, the ringgit traded at 3.7105 to the dollar. 

The Malaysian Insider reported that there was the perception of a “looming crisis”, with the value of the ringgit being close to 1997 levels.

On 8 June 2015, the ringgit dropped to 3.7743, the lowest since January 2006. 

On 9 June 2015, it fell to its lowest value against the Singapore dollar in 30 years, trading at RM2.77 to the dollar. 

Bloomberg reports that the depreciation is a ripple effect and “reflection of the absolute collapse in oil.” As oil is one of Malaysia’s main exports, the declining price of Brent crude oil of 38% from its June 2014 high is affecting the currency.

My beef with BNM is basically that they have consistently since the 1980's been leaning towards a weak ringgit to help prop up the export markets ....to the detriment of the people's standard of living. If you are a frequent traveler, you would have noticed by now the difference in quality and prices for basic foodstuff and other life style goods that is offered here in Malaysia and those of our immediate neighbors'. (In particular, Singapore and Thailand).

In effect, due to imported inflation factors and run-away prices (for services and non essential goods) since the implementation of the GST, more and more households in the Peninsular has been looking at holding higher debt ratios as a way of maintaining their current standard of living as their choices in purchasing consumer goods become lesser and lesser but spending increases due to rising costs.

Image via Rysherz Rayn

Money that is being made from consumer indebtedness and government spending outside of RM denominated purchases (overseas) is also part of the reason -causing the outflow of funds as Malaysia becomes less an attraction for investment as Bond Players chase higher revenues in their US Dollar. This outflow of Ringgits causes a weak response to ringgit purchases( i.e its nominal value) when traded against a basket of other currencies. This causes a vicious chicken and egg cycle.

The only way out of this vicious cycle of despair for countries is through higher productivity levels in both private and govt sectors.  Technology though, or better put, higher use of Tech can help the country raise productivity but that requires future planning and strong political will power in enacting ... a change in the way Malaysians look at life.( Hmm... somehow I do not see that happening  in the short term with the current way things are ). In 2014, USD 236 Billion was remitted worldwide by Migrants back to their home countries. Imagine how much of that is in Ringgit Malaysia? 

Now, added to this grouse is the fact that contrary to what some analysts have been suggesting, the world has not been deleveraging since the last financial crisis, and in fact has been growing its debt loads. Not only is total debt growing, it is growing at a faster pace than global growth, and it is doing so despite the strong tailwind of all-time low interest rates. 

Everything about this is not sustainable and at some point we will start to see defaults - which will cause panic in debt markets and interest rates to rise. Why, you ask me...well the most obvious answer would be the compounding interest on those huge debts!

(It is also pretty obvious that almost all things goes higher, as long as population growth, the rising middle class, urbanization of emerging markets' population ... goes up and this is what most economic planners bank on when assessing debt repayments- or in other words allowing the next generation to pay for today's expenditure). As long as that happens, any QE or releasing of liquidity will be viewed positively. 

The problem after 2008 has been that we opted for the easy way out, or rather all the developed countries did. (The Americans paved the way by allowing Quantitative Easing to become a household word). T
Fast forward to 2015 and today, the liquidity (easy money) swishing in the system way overwhelms the former factors. It is masking them really.

We think a property worth RM600, 000 in 2007 is now worth RM1.8m. We cite rising land cost, material costs, labor cost, easy loans, blah blah ...its all a reflection of overwhelming liquidity prompted by low interest rates.

But can monetary easing in the US by the Fed, BOJ or ECB affect us here in Malaysia? The reality is that it does and very easily so... low rates promotes carry trades, and search for higher yields = emerging and developing markets' assets (currency, property and stocks).

The same house could very well go back to RM1.0m in a global soaking up of liquidity. Of course the naysayers will remind us that these central banks will be ever slow to buy back bonds (soak liquidity). If these central banks won't do it, the markets will do it for them. When will we correct, when most people are bulls. 

The many bull runs from 2009 till today in various markets have been "not welcomed" because not "enough investors" have jumped back in yet. Much of the liquidity is still sidelined.

So when? I think another massive global property run up may just do the trick and push us over the precipice. So we may be 1-2 years away (at least). But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.

Today's raging crisis in Greece was hidden from view for many years in the run-up to its first EU bailout in 2010 because the common denominator of its reported leverage ratio-national income or GDP-was artificially inflated by the debt fueled boom underway in its economy.

In other words, it was caught in a feedback loop. The more it borrowed to finance government deficit spending and business investment, whether profitable or not, the more its Keynesian macro metrics-that is, GDP accounts based on spending, not real wealth-registered a falsely rising level of prosperity and capacity to carry its ballooning debt. 

In summary,readers, the world has been spending beyond its means, as evidenced by growing debt loads as a percentage of GDP, and when that confidence in the debt ends, not only will interest rates rise but global growth will plummet as many projects will no longer be funded by belt-tightening debtors. This will only accelerate investor worries about their debt holdings - a vicious cycle. 

As I've repeated above, our Malaysian society's predicament (in so much as personal debt, low value currency, & high prices of imported goods ) are concerned, we are coming at a situation where Personal DEBTS looks to be the single most dangerous looming event in the near future. 

Malaysia recorded a Government Debt to GDP of 52.80 percent of the country's Gross Domestic Product in 2014. Government Debt to GDP in Malaysia averaged 48 percent from 1990 until 2014, reaching an all time high of 80.74 percent in 1990 and a record low of 31.80 percent in 1997. Government Debt to GDP in Malaysia is reported by the Ministry of Finance, Malaysia.