Malaysia Loses Its Currency Rebel Tag — And Wins

(Bloomberg Opinion) — To Mahathir Mohamad, the dominant political figure in Malaysia for much of the country’s life, currency traders had accrued way too much power. They were prone to charge from one direction to another with a herd mentality and little regard for who got trampled. The former prime minister distrusted them and, during the Asian financial meltdown of the late 1990s, pegged the ringgit to the dollar and imposed capital controls. 
His successor undid that fixing almost a decade later and allowed the ringgit to float again. Officials have adopted a conventional approach to economics ever since. After some tough years, the country may be finally reaping the benefit: The currency enjoyed a monumental third quarter, rallying the most in at least half a century. It was the best performer among emerging markets, with the Thai baht running a close second. You can’t blame Bank Negara for taking a victory lap: the central bank last week projected “enduring support” for the ringgit.    
The herd is certainly charging today — in the opposite direction to the one that so upset Mahathir. The Federal Reserve’s interest-rate cut in September, and the prospect of more to come, fueled a rally in Asian currencies. Only the Indian rupee was left behind. Economic cycles come and go; it’s entirely natural that emerging markets enjoy favor when the Fed switches to a dovish stance. Even so, the appreciation in the ringgit, about 15%, is remarkable. Same with the Thai baht, which advanced more than 13%. 
What does this pair have in common to place them at the top of the class? The Fed’s pivot and a general retreat in the dollar are necessary, but insufficient, conditions. Orthodoxy may be making the critical difference. The curbs on portfolio capital flowing in and out of Malaysia weren’t the failure that critics contended they were destined to be. They were useful in the moment — and had a short life. 
In the 19 years since the ringgit was freed, Malaysia has taken a conservative line. There have been none of the fireworks of the Mahathir era: no threats to ban trading, no mutterings about forces out to crush the country. Subsequent leaders haven’t picked fights with investors along the lines of the former premier’s attack on George Soros. Policymakers just quietly got on with their job, hoping that stability would bring its own reward, eventually. 
Of course, they weren’t happy about the ringgit getting roughed up; the past decade experienced more retreats than advances. The Fed’s rapid hikes, beginning in 2022, were part of the story. The muscular greenback swept all before it, forcing Japan to intervene for the first time in a generation and helping to push Liz Truss out of Downing Street. Also counting against Malaysia was the epic level of corruption on display during the multi-billion dollar graft scandal known as 1MDB and, following that, a rare degree of political instability.
Prime ministers and shaky coalition governments came and went in Malaysia. Anwar Ibrahim, leader since an election in 2022, has painstakingly pieced together, and maintained, a national unity administration. The governing bloc scored a landslide win in a special election for a state district on the weekend, underscoring its staying power.
The absence of parliamentary ructions isn’t everything. In Thailand, the baht’s ascent survived the unseating of one premier by a court, the disbandment of the top opposition party, and the installation of the youngest-ever leader in the PM’s office. But, like Malaysia, the underlying philosophy of those actually managing the economy hasn’t changed. The political tumult made their steadfastness and lack of daring all the more evident. The Bank of Thailand was brow beaten almost daily by the Cabinet to cut interest rates, a step it has refused.
The overwhelming sense of “No” has been all the more remarkable given inflation is nowhere near the problem it became elsewhere. If anything, Thailand could do with a jump in the cost of living. Consumer prices rose just 0.4% in August from a year ago. Monetary policy looks tight. The central bank reckons those numbers don’t reflect the underlying demand in the economy and expect growth — and inflation — to accelerate with the fiscal stimulus planned by the government. 
Both Malaysia and Thailand starred during Asia’s economic travails of 1997-1999. Malaysia didn’t require a bailout but rebelled against the so-called “Washington consensus” of free markets. The collapse of the artificially high baht triggered the run on regional currencies. Both are well and truly back; Bangkok now even frets the baht is too strong. This performance couldn’t have happened without help from the Fed. But when that turn came, both were poised to capitalize. They made their own luck, but had to wait for circumstances to be just right.
The herd will again charge — that’s the nature of the business. The global FX market is worth $7.5 trillion a day and is driven mostly by sentiment toward the dollar, which features in around 90% of transactions. It would be churlish, however, to begrudge the Southeast Asian nations this success. 
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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.
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