What Affects Malaysia’s Economy If Not The Ringgit?

The Ringgit extended declines to its lowest level since the Asian financial crisis around 1998, prompted Malaysia’s central bank to say it doesn’t reflect the improving outlook of the economy.

Bank Negara Malaysia Governor Datuk Abdul Rasheed Ghaffour said yesterday (Feb 20) the recent performance of the ringgit, similar to other regional currencies, has been influenced by external factors where some of these factors include market adjustment to changing US interest rate expectations, geopolitical concerns and uncertainty surrounding China’s economic prospects.

He said, BNM is of the view that the current level of the ringgit does not reflect the positive prospects of the Malaysian economy going forward. Adding that growth in 2024 will be driven by the improvement in external demand and strong domestic spending.

Abdul Rasheed cited the latest IMF forecast is for global trade to improve from 0.4% in 2023 to 3.3% in 2024. For Malaysia, exports have shown steady improvements since the fourth quarter of 2023. In fact, the recently-released January 2024 exports have turned positive (+8.7%). The tourism sector has recovered strongly with tourist arrivals in 2024 expected to exceed the pre-pandemic levels of 26 million.

The local currency slipped past 4.80 against the dollar on Tuesday, its weakest level since reaching an all-time low of 4.8850 in 1998. The ringgit has slid by over 4% so far in 2024 as China’s sluggish economy hurts exports from Malaysia, adding to the currency’s losses from the previous three years.

The ringgit has slid to a 26 year low as of Tuesday against the dollar with international reports linking the weak performance to the country’s disappointing growth.

Where does the economic support lie?

Academically, the exchange rate’s role in driving Malaysia’s economic growth should not be denied in spite of its lack of importance. It acts as a catalyst to complement the economic growth factors. Experts argue neither high nor low official exchange rates are bad or reflecting the actual national economy because high or low exchange rates are good in different ways.

In most cases the exchange rate and inflation adversely affect the country’s economic growth. Past trends show that when the value of the Ringgit appreciates against the US Dollar, Malaysia economic growth rises or vice versa. So, the value of the Ringgit does affect the economy.

The yardstick to measure economic growth centers mainly on Malaysia’s gross domestic product (GDP) along with numerous micro and macro factors that contributes to economic growth.

These includes consumption, government expenditure, export and import trade figures, foreign direct investment, and the notorious inflation. Fundamentally, these factors must be guided by strong government in terms of policy implementation to see results.

The issue here would be the long-time frames needed to gauge results on government policies for example trade pacts on the economy.

To strengthen the ringgit and control inflation, some have suggested that Bank Negara raise interest rates and tighten our monetary policy. Such measures are deemed ineffective against a backdrop of global supply shortages due to geopolitical tensions, because a tighter monetary policy cannot guarantee more supply of goods like oil, computer chips and other necessities.

Finance Minister II Datuk Seri Amir Hamzah Azizan expects the ringgit to strengthen against the US dollar this year as the US Federal Open Market Committee (FOMC) has signaled the end of interest rate hikes after raising the benchmark interest rates 11 times since March 2022 to the current rate of 5.25-5.50 per cent.

“The US Federal Reserve (Fed) has probably reached the end of the interest rate hikes period, so we expect this year that we should see the interest rate to be chipped off in the US if there are no material geopolitical events, we should see the ringgit strengthened throughout the year,” he said.

“Apart from that, all the hard work that the Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim and Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Abdul Aziz have done to bring in the foreign direct investments (FDIs) will also play a part in strengthening the local economy… this will surely improve the ringgit’s (performance),” he said yesterday.

Amir Hamzah, however, refused to predict the local note’s performance against the greenback by year-end.

“In terms of the performance, let us wait. Let the market decide,” he added.

Asked if there is a need to peg the ringgit to the greenback, Amir Hamzah shrugged off the suggestion as he said the current situation is very different from what happened during the 1998 Asian Financial Crisis.

“When we pegged the ringgit to the US dollar in 1998, we were reacting to a very different scenario and a very different financial capacity of the country. But today, when you look at the country’s reserves, the debt exposure and the financial liquidity in the market, Malaysia does not need to peg its currency.

“Moreover, the Fed has signalled that they are going to end the interest rate hikes, so let the currency adjust back as these elements go through,” he said.

“Malaysia’s inflation rate is still low, so the BNM does not have to use the monetary tool to curtail that part. The current rate of three per cent is the rate that (is needed to) facilitate economic growth,” he said.

The implications felt by the people on the declining Ringgit is adverse and contributes to a rising cost of living, or the Ringgit actually buy less goods today.

Investors leave Malaysia?

Meanwhile, Reuters reported today (Feb 21) Malaysia’s ringgit is trading at lows not seen since the Asian Financial Crisis as outflows, foreign currency hoarding and a strong dollar pile on pressure. The currency is the first in Asia to break below October 2023 levels on the dollar. It touched 4.801 to the dollar on Wednesday, its weakest since January 1998.

Receding bets on US interest rate cuts are also driving the gap between 10-year US and Malaysian rates back toward October’s 16-year wides in favour of US yields.

Why it’s important

The weakness defies steadiness in oil prices — a Malaysian export — and prospects of recovery in electronics exports. It shows investors have little appetite for Malaysian assets.

Key quotes

“Weakness cannot really be blamed on speculative flows since this has already largely been curbed since a policy ban on ringgit offshore trading since 2016,” said Rong Ren Goh, fixed income investments director at Eastspring Investments in Singapore. “Weakness is driven by real flows.”

By the numbers

Malaysia’s trade surplus narrowed to RM10.12 billion in January, with imports growing faster than exports.

Portfolio flows have been negative for much of the past decade, hitting RM50.6 billion in 2022 — the largest since 2008 — and RM45.7 billion last year.

Since loosening requirements on exporters’ FX conversion in 2021, businesses’ foreign currency deposits have surged nearly 70% to hit a record RM138.4 billion in Dec 2023, according to central bank statistics.

The FX market is short ringgit, according to Reuters’ polling, though not at stretched levels.

The response

Malaysia’s central bank, in a statement released on Tuesday, said the recent performance of the ringgit was largely due to external factors and the finance minister has said he expects a rebound in the currency as US interest rates fall.

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