The Malaysian ringgit has endured a torrid year on foreign exchange markets, as the export-focused economy contends with the aftershocks of steep interest-rate increases in the United States, and the slower-than-expected return of top trading partner China from its long self-isolation during the pandemic.
The currency has been Southeast Asia’s worst performer so far this year. It hit a seven-month low on Friday last week, ending the week at 4.672 to the US dollar, according to a Reuters report.
It rebounded slightly this week after the central bank said it would intervene to restrict “excessive” currency movements, adding that the ringgit’s value did not reflect the country’s economic fundamentals.
The ringgit ended at 4.6635/6705 against the greenback compared with 4.6705/6740 on Wednesday, according to Bank Negara Malaysia urging the central bank to step in to stabilise the local note amid ‘excessive’ losses.
But the central bank’s confidence in the ringgit is not shared by a public who had emptied out their savings to survive the pandemic, only to emerge into a cost-of-living crisis and find that their money buys them less than it did.
Exporters and tourism players stand to benefit from the weak ringgit, experts say, with foreign clients and tourists more inclined to leverage their stronger currencies. Locals, meanwhile, end up having to hold back as the prices of everything, from their favourite imported biscuits to cosmetics and even fresh chickens, have gone up.
With just weeks to go before Prime Minister Dato Seri Anwar Ibrahim’s administration faces its first real test in state elections, the ringgit’s weakness may also take on a political dimension.
In an effort to overcome the problem of the ringgit’s devaluation, the government is seeking to strike a balance so that the country’s interest rates will not cause foreign investors to take their money out of the country, said Anwar at a recent event.
The Prime Minister said the drop in ringgit was linked to the country’s low interest rates, and if the government raised the interest rates too much, it would burden small and medium companies.
“If I have RM1mil, I want to put it in a bank. I have a choice of Malaysia, Singapore and Indonesia. Singapore and Indonesia, which have high interest rates. So, I choose to save it outside (Indonesia and Singapore). That is our problem now,” he said.
He said this when answering a question from a Form Six student identified as Adriana, who wanted to know what the government was doing to strengthen the country’s currency.
Anwar, who is also Finance Minister, said although faced with a declining ringgit, the country’s economic growth continued to rise in the first quarter of this year, surpassing that of Singapore, Indonesia and China.
“If would have been different if our economy had dropped, with a drop in the ringgit’s value, lower investment and lower growth. But that was not our case. Our investment is good at RM71bil in the first four months. We just have to find ways to bring back investments with several incentives,” adding earlier, policy issues and international constraints are among factors that contributed to the weakening of the ringgit.
Why is the ringgit tanking?
The ringgit’s weakness stems from pressures that are beyond the control of either the government or the central bank, Bank Negara Malaysia (BNM), experts say, as portfolio investors keep their distance from emerging markets amid the US Federal Reserve’s rate increases and China’s slow recovery.
Demand from China – Malaysia’s largest trading partner – has been muted at best over the first five months of this year, with the vast majority of sectors posting annual declines in shipments.
“While Malaysia is not alone in experiencing sizeable currency depreciation against the US dollar, its steeper decline versus its Asean peers could be attributed to its higher exposure to the Chinese economy and renminbi movements,” said Yeah Kim Leng, an economics professor at Malaysia’s Sunway University.
The US dollar’s strength, which has largely been attributed to the Fed’s aggressive efforts to contain inflation, also ended up triggering a panic among developed economies rushing to avoid falling into stagflation – where stagnating growth meets soaring inflation.
This soured the mood among consumers in many Western economies, which are key markets for electronics exports from Malaysia and other Southeast Asian nations.
The ringgit is also vulnerable to being dragged down by easing global commodity prices, with commodity exports such as palm oil, sweet crude and natural gas accounting for a sizeable chunk of Malaysia’s shipments.
Economists say Malaysia has done what is necessary to shore up its economy while holding down inflation – a primary target of the central bank when it decides to raise its benchmark interest rate.
Yet watchful investors “have adopted a ‘wait-and-see’ attitude … resulting in weaker ringgit demand”, Yeah said.
Who is hurting?
On the ground, Malaysian consumers – especially those in the middle class – have had to make increasingly hard decisions when they shop, as the weak ringgit means costlier goods.
For A. Raman, eating healthily has always come at a premium, but he now has to spend even more time searching for cheaper alternatives to the gourmet cheeses and other ingredients that make his daily salads more palatable.
“I’ve stopped buying imported foods because they’re just too expensive now,” the IT professional said. “I’ve Googled for more recipes that use cheaper ingredients that can be found locally.”
But the weak currency also presents a path towards potentially higher revenue for some sectors.
Last week, the Malaysian Association of Hotel Owners (Maho) suggested that they be allowed to charge foreigners in US dollars, to boost their revenues as they deal with slow post-pandemic recovery and higher costs from a government-mandated minimum wage and higher electricity tariffs.
“Hotels should now do something to get better revenue and increase yield since the cost of doing business … has gone very high. Occupancy has not improved much either, around 45-55 per cent,” SCMP cited Maho president Teo Chiang Hong telling a local English newspaper.
What about exporters?
Previous periods of ringgit weakness had broadly provided a boon for exports as destination countries bought more Malaysian products on the cheap.
“Exporters benefit most from a depreciation as well as other corporations holding foreign currency,” Geoffrey Williams, an economist with the Malaysia University of Science and Technology, told This Week in Asia.
But that may not be the case this time, as key Western markets increased interest rates to fight their own inflation crises, squashing demand for Malaysian shipments of semiconductor components and other electronic goods.
Local technology players in the semiconductor and consumer electronics sectors have suffered over the first quarter of this year, with Western demand soft and China’s much-trailed reopening failing to lead to an explosion of Southeast Asian exports.
What options are there?
The last time BNM intervened in the market, it banned offshore trade of the ringgit in the aftermath of Donald Trump’s shock win in the 2016 US presidential election, which triggered a global sell-off in emerging markets.
The move sparked a revolt among foreign portfolio investors, though they eventually returned as the central bank improved its onshore trading facilities.
Malaysia’s PM Anwar faces first ‘worrisome’ test as state polls loom
This time there was not much policy space – or reason – for BNM to be as aggressive in its response, as it lacked sufficient foreign currency reserves to meaningfully influence the ringgit, while a steep increase to its key policy rate would have limited effect on the ringgit and “crush” borrowers, Williams said.
“So, maintaining an independent policy stance, keeping to its mandate and promoting fundamentals is the best option for BNM,” he said.
“Encouraging firms to buy ringgit with their foreign currency reserves will also help in the short term as a market-driven response.”
In the quest for stability, there have been rumblings of a return to a ringgit peg to the US dollar.
But Deputy Finance Minister Ahmad Maslan dismissed the idea, saying it would undo whatever progress gained from the increases to BNM’s key rate and restrict capital flows.
Sunway University’s Yeah agreed, saying: “The most compelling reason for not resorting to a currency peg is that the country is not experiencing an economic or financial crisis.”
What will the effect be on state elections?
The opposition Perikatan Nasional bloc has demanded that heads must roll over what it had described as the government’s failure to manage the economy.
“The opposition’s narrative is more on the government failing to deliver what it has promised or advocated to deliver when it was in opposition,” said Hafidzi Razali, an associate director with government affairs and public policy consulting firm BowerGroupAsia.
But as Anwar’s coalition faces six looming state polls, currency woes may be the least of his problems.
“[The ringgit weakness] will be a point of ridicule, but not a major factor to swing voters,” Razali said. “It will be linked to the cost of living, as that is more relatable to the masses.”
