PETALING JAYA: The phantasmagorical recovery experienced by the ringgit over the past weeks demonstrated, once again, that financial markets often react on expectations rather than real economic fact, said the Center for Market Education (CME).
In fact, CME, in a statement, said it has seen how the ringgit recovery started before the US Federal Reserve announced a higher-than-expected rate cut: market operators acted on the expectation that the cut would come, and then continued to strengthen the Malaysian currency on the expectation that the new Fed trend would continue.
“The higher degree of political stability experienced by Malaysia when compared to regional peers added steam to a positive trend guided by expectations. In fact, we can say that nothing in the Malaysian economic fundamentals, politics or economic policy really changed between the big depreciation (February 2024) and the current recovery,” it added.
While for the United States this was the first cut after an aggressive fight against lockdown-induced inflation, China’s central bank pursued another policy rate cut, immediately after the announcement of further monetary easing measures and yet-to-be specified fiscal stimulus, in an attempt to aid the economy amid concerns that Beijing’s annual growth target is increasingly out of reach, said CME.
“With both America and China moving into an expansive monetary trend, resurgent risks of inflation must be monitored: we find ourselves again in the situation that an excess of money supply may not only trigger excessive consumer spending, but also direct investments in directions justified only by the abundance of capital, rather than by the existing structure of supply and demand. Let us not forget that the past year quantitative easing already ignited the tech speculative bubble,” it added.
CME said with budget season approaching, these elements need to be taken into account: it is imperative to preserve the currency strength with signals that could further strengthen its position.
At this regard, the Center for Market Education expects to see the government announcing the pillars of a holistic tax reform: in the past years, some steps in terms of fiscal consolidation have been done mostly adding new and targeted taxes, while little has been done on restructuring the spending side in a radical way. Instead, according to CME, it is now the moment to initiate a reform inspired by consolidation, simplification and easy enforcement.
The pillars of such reform are slight reduction of income tax; introduction of a multitier Goods and Services Tax; introduction of a special and simplified fiscal scheme for microbusinesses; and revision of government-linked companies’ profitability with a plan of gradual rationalisation, which implies closures, consolidation and opening to the market.
Such reform could consolidate the government’s fiscal position while at the same time limit the impact of arising inflationary tendencies due to the new monetary policy trend in the US and China, said CME.
