Newspaper Article

De-dollarising seems to be in vogue these days. China, Russia and their BRICS (Brazil, Russia, India, China and South Africa) partners may have initiated the narrative but the desire to remove or at least reduce the US dollar's hegemony has spread. Many nations, including Malaysia, have openly articulated their desire to move away from US dollar dependence for their trade. Though it has been a long time coming, the rising disdain of the US dollar is in no small part due to American policy hubris and abuse of its reserve currency status. As the only country that can repay its foreign debt in its own currency, it has run years of current account deficits, created a mountain of debt surpassing US$30 trillion (RM136 trillion) and effectively piggybacks on the rest of the world with its autarchic monetary policies.

What a month March had been. Over a three-week period, four mid-size US banks had to be rescued and one large Swiss bank had to be folded into another. Meanwhile, a German bank had to suffer serious erosion of its equity value. It started with Silicon Valley Bank (SVB) needing to be rescued following a run by its depositors, on news of its loss of some US$2 billion (RM8.8 billion) from the sale of US government bonds it had been holding. It appears that SVB was holding a huge portfolio of long-dated government bonds - a clear case of a serious duration mismatch. Surprisingly, no one, not even the banking regulators, seemed to have been watching interest rate risks, even as the US Federal Reserve had been raising rates rapidly. Rising rates affect the value of items on a bank's balance sheet. Both assets and liabilities are affected, with the impact being determined by the duration of each item. Given the intermediation function of banks, the duration of assets is invariably longer than that of liabilities, a large part of which would be deposits. Thus, a bank holding large amounts of long-dated bonds would have a disproportionately large asset side duration and. accordingly, a large duration gap, making it highly susceptible to even small interest rate rises.

Of late there has been much hand wringing about the performance of the Malaysian ringgit. The ringgit's depreciation has been steady and sustained against several key currencies, in particular the US dollar. Indeed, there is cause for concern as exchange rates do matter for the long-term well-being of a nation. The experience of countries like Japan, South Korea, Taiwan and China show that cleverly managed exchange rates can be the enabler for national growth and prosperity. Yes, a nation needs much more than just exchange rate policies to succeed. But a well-formulated exchange rate regime can enhance competitiveness, incentivise the right type of industry formation, enable the macroeconomy to evolve as needed and optimise allocative efficiency. On the other hand, an ill-conceived exchange rate regime can stunt economic progression and nudge countries into a low-value-added, low-income trap.

It was the Ricardian theory of comparative advantage that provided the rationale for why nations should trade among themselves and how it can be beneficial to all. Steady growth in trade led to increased economic integration between countries and the resulting globalisation. The post-war years, from 1945 onwards, saw extensive growth in cross-border movement of goods, services and capital. This peace dividend, which sustained over the next decades, received a major boost in the 1980s with the integration of China and the former Soviet bloc nations into the global trading system. The subsequent formation of the World Trade Organization also helped further the globalisation process by establishing a framework of rules and norms. Over the years, despite the ebbs and flows, there is no disputing the many benefits that have accrued to the global community. Globalisation enabled poorer countries to catch up and pull themselves up through export-oriented growth. As a result, at least a billion people have been estimated to have been pulled out of poverty. Nations became closely integrated as production became increasingly specialised in the name of economies of scale and cost efficiencies. As output efficiencies reduced product costs and increased affordability, the poorest segments benefited. Further, as outsourcing of manufacturing and services from high cost to lower cost nations became necessary for competitiveness, skilled and semi-skilled labour in developing countries benefited. China became the world�s factory and India the provider of its backroom support systems. Despite these obvious benefits of globalisation, a recent International Monetary Fund (IMF) policy paper points at rising discontent and dysfunctional policies initiating a process in reverse thrust. The inflection point according to the paper was the post-global financial crisis period from 2009.

For at least the last two decades, a presence in China was seen by Western firms as a distinct competitive advantage over their peers. Now, all that seems to be changing. American and European suspicion of China has been rising as China seeks to control its technological destiny. For as long as China was a low-cost, low-value-added producer of basic goods, it fit into Western needs for cheap consumer products. But as China moved up the value chain and made known its intention to master and indigenise advanced technology under its Made in China 2025 policy, Western backlash followed. A China seeking technological parity with the West, particularly in key industries like artificial intelligence, 5G, semiconductors, aerospace and bio�technology was simply not acceptable to Western policymakers. What began as the imposition of tariffs evolved into outright sanctions, particularly against Chinese tech giants like ZTE and Huawei.

In 2018, the global economy began with much promise. The prior year had seen fairly strong and synchronised growth across the US, Western Europe and industrialised Asia. Stock markets rose to reect this steady stable growth. The S&P 500 had one of its most consistent and strongest runs in the 10-month period leading to October 2018. The broad-based index reached its historic peak in late September. Since then, from October, both the global economy and stock markets appeared to have gone through a series of jolts. Risk and volatility appear to have returned with a vengeance. The last quarter (4Q) of 2018 was tumultuous from an economic viewpoint. Why the sudden turn of fortune? For one thing, the bull run in the US stocks has aged. The post-crisis recovery is now 10 years old. The monetary stimulus is a spent force, but the resulting build-up in global debt remains.