The US Treasury is due to release its report on foreign currency manipulators soon. Malaysia, Singapore, and Vietnam, which were cited for the first time in May, are expected to be on the watch list. Out of the three criteria set by the US Treasury, Malaysia meets two as a currency manipulator.

However, in our view, the issue of the persistent “one-sided” intervention may not be serious. On the current account of the balance of payment, with commodity exports playing a crucial role in influencing our trade surplus, Malaysia is more impacted by the movement of global market forces as compared to the exchange rate. As for manufactured surplus, with export-oriented multinational corporations here, the current account surplus shows that the economy is diversified. Therefore, the view of Malaysia being a currency manipulator could be over-exaggerated.

Risk of returning as a currency manipulator

• The US Treasury’s report on foreign currency manipulators — a twice-yearly report – should be released soon. It comes at a point where we are experiencing global uncertainties on the back of geo-economics and geopolitical issues.

• Expectations are that the report is likely to label countries like Singapore, Malaysia and Vietnam on the watch list. While Thailand may have avoided being on the watch list in the May report, it could find itself on the list this time due to its trade surplus with the US.

• China has been formally labelled a currency manipulator in August. South Korea will remain on the watch list due to its trade surplus with the US in the 12 months through August widening back to above US$20 billion in addition to its bloated current account surplus. Japan will likely be flagged on two issues i.e. (1) its trade surplus with the US has climbed to more than US$48 billion; and (2) the current account balance is large. But Japan maintains that it is still not intervening in the currency market.

• A country falls into the watch list if it meets two of the following three criteria:

1. Trade surplus with the US of at least US$20 billion;
2. Current account surplus of a minimum of 2% of GDP; and
3. Persistent one-sided intervention in the currency equivalent to 2% of GDP in six months of a year.

A glance at the region

• Although Singapore enjoys a huge current account surplus of almost 18% of GDP, on the intervention front, it may have less to worry about. The reason is that the Monetary Authority of Singapore (MAS) conducts its policy by intervening in the foreign currency market rather than setting interest rates. The MAS' intervention aims to keep inflation under control and not to manipulate the currency for export advantage. Besides, the MAS has pledged more transparency in its foreign exchange purchases, a move welcomed by the US Treasury report.

• As for Vietnam, the US Treasury’s interpretation is that foreign exchange intervention was done in both directions in order to better link the Vietnamese dong to the greenback. There was “reasonable rationale” for rebuilding inadequate reserves. But the country seems to face the risk of being hit by US tariffs and the Trump administration as a currency manipulator.

• In the case of Thailand, it managed to dodge the watch list in the May report. However, there is growing risk it could be in a cross road. Thailand’s trade surplus with the US in the 12 months through August nears US$20 billion while its current account surplus remains above the 2% threshold.

What about Malaysia?

• Based on the criteria set by the US Treasury, we fulfil two of the three criteria as a currency manipulator i.e.: 1. Malaysia’s trade surplus with the US has not changed much. As at end August, our trade surplus with the US was US$25.8bil. From our computation, the 2019 trade surplus is projected at around 2018’s reading of US$38.6bil. 2. Our current account surplus has widened to reach 3.1% of GDP in 2Q2019 from 2.1% of GDP in 2018.

• In our view, the issue with regards to the persistent “one-sided” intervention may not be serious. Looking at Bank Negara Malaysia (BNM), over the last few years it has been intervening in both directions of the foreign exchange market, not one-sided. Also, BNM’s intervention is to ensure an orderly market and avoid excessive volatility of the exchange rate that can affect macroeconomic stability. Hence, the fluctuation of the ringgit over the years points to the flexibility of the exchange rate.

• As for the issue of the current account of the balance of payment, being a small and open economy, we are affected by both internal and external developments, including cyclical and structural factors. And with commodity exports playing a crucial role in influencing our trade surplus, we are more impacted by the movement of global market forces as compared to the exchange rate. And for manufactured surplus, with export-oriented multinational corporations here, the current account surplus shows that the economy is diversified.

...Malaysia does not look like a currency manipulator

• In a nutshell, the view of Malaysia being a currency manipulator could be over-exaggerated. We support free and fair trade that has no place for unfair currency practices. Besides, with the ringgit exchange rate being market-determined, it is not a factor that we rely upon for exports competitiveness.

• Even if Malaysia is being viewed as a currency manipulator by the US Treasury, under a 2015 law, Washington will need to spend a year to resolve the problem through negotiations. Only if those talks fail, can the US take a number of small steps in retaliation, including stopping the US Overseas Private Investment Corp, a government development agency, from financing any program in Malaysia.

Source: AmInvest Research - 5 Nov 2019