The Wrong Slant In The Weaker Ringgit Debate

Not many Malaysians know the downside of a strong currency is it can exert a significant drag on the economy over the long term, as entire industries are rendered non-competitive and thousands of jobs are lost.

While some might prefer a strong currency, a weak currency can result in more economic benefits.

There is a common fallacy about exchange rates that say a “stronger” or “appreciating” currency must be better than a weaker or depreciating currency, but it is actually not that obvious that “strong” is necessarily better than “weak”.

Even in military terms, a “strong” army need not necessarily be invincible or a “strong” fighting force. Just look at the recent counter-offensives by the “weak” army of Ukraine, which has caused the “stronger” Russian army to withdraw from the Kharkiv helter-skelter.

But do not let this confuse you. Stronger currencies are not necessarily better, it’s just a different ballgame. 

Consider, for example, the impact of a stronger ringgit on six different groups of economic actors:

(1) Malaysian exporters selling abroad; (2) foreign exporters (firms selling imports in the Malaysian economy); (3) Malaysian tourists abroad; (4) foreign tourists visiting Malaysia; (5) Malaysian investors considering opportunities in other countries; and (6) foreign investors considering opportunities in the Malaysian economy.

Malaysian exporter: A stronger ringgit is a bane for a Malaysian exporter. When the exporter earns foreign currencies via export sales and then converts them back to ringgit to pay workers, suppliers, and investors, the stronger ringgit means that the weaker foreign currency buys fewer ringgits and the firm’s profits (as measured in ringgit) fall.

As a result, the firm may choose to reduce its exports, or it may raise its selling price, which will also tend to reduce its exports. In this way, a stronger currency reduces a country’s exports.

Foreign exporter: For a foreign firm exporting to Malaysia, a stronger ringgit is a boon. Each ringgit earned through export sales, when traded back into the domestic currency of the exporting firm, will now buy more of the domestic currency.

As a result, the stronger ringgit means the firm will earn higher profits than expected. It will then seek to expand its sales in Malaysia, or it may reduce prices, which will also lead to expanded sales. Consequently, a stronger ringgit means consumers will purchase more from foreign producers, expanding the country’s level of imports.

Malaysian tourist: For a Malaysian tourist abroad exchanging ringgit for the relevant foreign currency, a stronger ringgit is a benefit. He receives more foreign currency for each ringgit, and thus the cost of the trip in ringgit is lower. When the ringgit is strong, it is a jolly good time for Malaysians to tour abroad.

Foreign visitors: A relatively stronger ringgit means their own currencies are relatively weaker, and as they convert their own currency to ringgit, they have fewer ringgit than previously. When the ringgit is strong, it is not an especially good time for foreign tourists to visit Malaysia.

Overseas Malaysian investor: A stronger ringgit is a curse for a Malaysian investor who has already invested money in another country, as he must first convert ringgits to a foreign currency for investment in the foreign country, and then later converts that foreign currency back to ringgits.

If in the meantime the ringgit becomes stronger, then when the investor converts back to ringgits, the rate of return on that investment will be less than originally expected at the time it was made.

Foreign investor in Malaysia: A stronger ringgit is a blessing for a foreign investor putting monies into a Malaysian investment, as it will boost the returns of the said foreign investor, as he converts from his domestic currency to ringgits for investment in Malaysia, while later planning to switch back to his domestic currency.

If, in the meantime, the ringgit grows stronger, then when the time comes to convert from ringgit back to foreign currency, the investor will receive more foreign currency than expected at the time the original investment was made.

For all these cases of a stronger ringgit, the reverse holds true for a weaker ringgit.

So what all this means is for a given stronger/weaker ringgit, three groups of economic actors experience bliss, while another three experience misery and all the groups that enjoy bliss with a regime of weaker ringgit will experience misery with a stronger ringgit and vice versa with the other three groups in the case of a stronger ringgit.

So from the above explanation politicians who accused the government of not knowing what to do to “strengthen” the ringgit is barking up at the wrong tree.

If the government listens to them, then what will happen is the stronger ringgit will change position – the smiley economic actors will become miserable, and the miserable will become the smiley emoticons.

The government correctly sees the weakening ringgit as a non-issue as it will not lead Malaysia to an economic crisis as Finance Minister Tengku Dato’ Seri Zafrul Tengku Abdul Aziz puts it.

It is fashionable nowadays in this era of the financial crisis to see one country’s currency stronger, and this has become somewhat populist, especially at a time of election fever.

If these politicians come into power with their own idea of a stronger ringgit while remaining disconnected from the real issue of a weaker ringgit vis-à-vis a stronger ringgit, the country will go down the drain.

In economics, as opposed to a depreciation of the currency, we’ve got to be very careful when there is a sudden 20% decline in the ringgit because that will be as good as a devaluation of the currency that could lead to imported inflation for countries that are substantial importers.

One other thing the politicians clamouring for a stronger ringgit got wrong is the slant of the story on the weaker ringgit. It is not that the ringgit is weakening against all other currencies, but rather mainly with the US dollar, the reserve currency of the world.

And the US, like its allies in the EU, is in a Catch-22 situation. The massive sanctions they imposed on Russia not only hurt Russia but boomerang to them as well in the form of an unprecedented spike in energy and food prices causing galloping inflation that was not seen in many years.

This high inflation can only be tamed with higher interest rates and the US Federal Reserve (The Fed) is very focussed on sticking to aggressive rate hikes as inflation stays hot.

The Fed is expected to deliver a third straight 75-basis point interest rate hike this week, if not more after a US government report showed that consumer prices did not ease as expected in August and price pressures appeared to broaden.

With aggressive rate hikes, the US dollar is bound to appreciate again against all currencies in the coming days and weeks although the US is aware such aggressive policies could result in the country going through a recession which will be contagious in spreading to other parts of the world.

But this is another Catch-22 story that will unfold much later and it would be interesting to watch when the US will stop these aggressive rate hikes in order to prevent a recession. 

Thus we can clearly see the angle or slant of the story as the ringgit weakens against the US dollar is then the story of almost all major currencies undergoing depreciation against the US dollar including the mighty Euro, the currency of the EU countries.

And thus the issue becomes is Malaysia the worst affected country in terms of currency depreciation against the US dollar?

As pointed out by Zafrul while the ringgit has depreciated by 7.5% against the greenback since the beginning of 2022, many currencies in the region and developed countries have also fallen against the greenback.

Malaysia is actually doing well in comparison to Japan, UK, and EU, as the slide in ringgit is the lowest compared to the slides in the currencies of these three countries.

Also, the ringgit has strengthened against the currencies of Malaysia’s other trading partners such as Japan, the UK, the EU, New Zealand, and South Korea.

Additionally, economic fundamentals that have continued to strengthen are important in determining the robustness of the ringgit.

These include GDP growth on the rise for every quarter beginning with the last quarter of 2021, the unemployment rate of 3.7% in July 2022 being the lowest since the Covid-19 pandemic hit the country, the robust rise in the Industrial Production Index, the wholesale and retail trade, and export figures.

The country’s inflation rate is also manageable at 2.8% for the first seven months of 2022 due to price control measures, particularly through the provision of subsidies of almost RM80 billion this year.

What was the reaction of these politicians who seems to be ‘paralysed’ by a weakened ringgit to Zafrul’s statement?

Contemptuously accusing him of downplaying the ringgit’s slide, and warning him a downtrend against the greenback would affect Malaysians as it would see an increase in the cost of imported food as if Zafrul is too naïve not to know this.

The problem of the rising cost of imported food predates the current slide in the ringgit. In fact, the general problem of the rising cost of living is a perennial problem.

Even economists interviewed said the ringgit slide effect on daily life is minimal, although it’s best to cut spending.

Jamari Mohtar is the Editor of Let’s Talk!, an e-newsletter on current affair.

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