By WILLIAM PESEK
Barron’s
November 24, 2016

It’s time the nation’s embattled leader looked in the mirror and examined his role in the ringgit’s recent plunge.

No country in Asia plays the blame game like Malaysia. When the economy crashed in 1997, it faulted speculators and Jews. When it stumbled in 2013, it fingered the Federal Reserve. When Prime Minister Najib Razak tried to explain away an ongoing corruption scandal, he talked of overseas conspirators. Malaysia’s latest scapegoat? Donald Trump.

Granted, this last deflection isn’t as fanciful as the others. Malaysia has as much, or more, to lose from the president-elect killing the Trans-Pacific Partnership as any nation engaged in the deal. And Trump’s shock victory on Nov. 8 has emerging markets running scared about the direction of American economic and foreign policy.

But blaming Trump for the ringgit’s dismal performance is just shameless. Valid reasons for the currency’s 5% plunge over the last 17 days include an outsized dependence on oil revenue, the failure by a succession of leaders over the last 20 years to restructure the economy and the scandals overwhelming Najib’s government and his party.

Disarray in Putrajaya is eclipsing a reasonably good macroeconomic picture. The economy grew 4.3% last quarter from a year earlier. The problem, though, is a debt-laden national balance sheet, policy paralysis and darkening global trade picture. As Adam Slater of Oxford Economics points out, Malaysia faces capital-outflow risks even if Trump proves to be “benign” for the global economy. Slater lists Najib’s nation along with Colombia, Egypt, Mexico, Saudi Arabia, South Africa, Turkey and Vietnam as weak global links no matter what Trump does, or doesn’t.

It’s time Putrajaya owned that – and looked in the mirror. Instead, it’s once again treating symptoms or “Malaise-ia,” as some economists call it, not the underling ailments. Markets are buzzing, for example, about the return of capital controls, a policy that harkens back to the darkest days of 1997 and 1998. Bank Negara Malaysia recently tiptoed in that direction, clamping down on offshore ringgit trading. The step resulted in confusion and a sense of financial limbo at the very worst moment.

Déjà vu, too. Najib’s team can’t nix the parallels to then-Prime Minister Mahathir Mohamad’s 1998 move to peg the ringgit at 3.8 to the dollar and ban offshore currency dealing. Mahathir blamed U.S. billionaire George Soros, his fellow “rogue speculators” and some shadowy cabal of Jews attacking his Muslim-majority nation. Now, the focus is on another American billionaire. But here’s the thing. Malaysia is free to blame the “Trump tantrum” for forcing it to put the training wheels back on. Or it can internalize why, 18 years on, it’s still so vulnerable to the whims of traders.

Global funds hold more than a third of government debt. That could be seen as a sign of openness and Malaysia’s relative attractiveness. But without concrete steps to modernize the economy, it leaves the economy perennially exposed to emerging-market volatility. It’s troubling to see Malaysia again favoring limits on capital over getting under the economy’s hood. If Malaysia goes too far, it risks “scaring away” foreign investors, warns Brown Brothers Harriman.

Another big question is whether Bank Negara will intervene. The good news is that foreign currency reserves are much higher than in the late 1990s, reaching a peak of $141 billion in 2013. The bad: reserves are about 30% below that level, making Governor Muhammad bin Ibrahim think twice about joining peers in Indonesia and India in supporting currencies. It also limits his latitude to cut interest rates (Malaysia left rates alone yesterday).

But Bank Negara isn’t well placed to control the offshore market in the long run. Traders know that, as of Nov. 15, it only had reserves equivalent to 1.2 times short-term external debt – or enough to handle 8.4 months of retained imports. Not exactly where a developing nation wants to be in 2016.

The onus is on Najib’s government to diversify growth sources. It must dismantle an antiquated affirmative-action program that discriminates against non-Malays, killing innovation, depressing productivity and repelling foreign investment. It also must tackle the crony capitalism that concentrates the benefits of growth among the elites.

Scandals surrounding 1Malaysia Development Berhad, the investment program Najib created in 2009, say it all. Rather than get to the bottom of billions of missing dollars – or the $700 million in Najib’s personal accounts – the ruling United Malays National Organisation circled the wagons, obfuscated and blamed oversees interests looking to embarrass Malaysia. And yet overseas investigators in Hong Kong, Luxembourg, Seychelles, Singapore, Switzerland, the United Arab Emirates and the U.S. are unearthing troubling truths at the root of why investors are turning on Malaysia.

Odds are, Trump will end up copping to any number of market calamities in his four-year term. Emerging economies are right to be worried. But if Najib thinks he can put Malaysia’s troubles at Trump’s Oval Office door, he’s sorely mistaken.