KUALA LUMPUR – Despite the recent plunge of the ringgit to a 26-year low against the US dollar, economists remain optimistic about Malaysia’s prospects, advocating for a nuanced discussion on the currency’s situation.
Bank Muamalat Malaysia Bhd chief economist, Mohd Afzanizam Abdul Rashid, acknowledged the natural fluctuations in the ringgit’s value. He however emphasised that external factors influence its value, while domestic factors such as the state of the economy and policies play a crucial role.
Despite the recent decline, Afzanizam highlighted positive indicators such as Malaysia’s current account surplus, declining fiscal deficits, and a healthy labour market.
He cautioned against a hasty fix, pointing out the need for consistent economic reforms to boost foreign investor confidence gradually.
However, he mentioned that the ringgit’s decline hit a notable milestone on Tuesday (February 20), reaching a 26-year low against the US dollar, prompting concerns among the public.
He said that the value of the ringgit tends to fluctuate, but in light of the volatility it was quite common that the value of the ringgit would deviate from its “fair value”.
Looking at macroeconomic indicators, Malaysia’s current account is still in a surplus balance at 1.2% of GDP in 2023, he said.
“This indicates that the country has savings that can be used to be invested in the country,” Afzanizam told Scoop.
He also pointed out that the government’s fiscal deficits are declining, with the latest number showing fiscal deficits as a percentage of GDP dropped to 5.0% in 2023 from 5.6% in the previous year.
“Our labour market is in full employment status, as reflected in a lower unemployment rate of 3.3% at the end of 2023. In that sense, the value of the ringgit should be better than what it is,” he said.
“However, the value of the ringgit is being determined by market forces, which can revolve around sentiment, fear, and greed.
“Therefore, we need to have an open mind when discussing the ringgit. Factors are mostly from abroad, such as the US dollar, the prospect of US interest rates, crude oil, Chinese Yuan, among others. Domestically, it can be the state of the economy and policies.”
Assesing the true impact
Afzanizam said the impact of the ringgit’s fluctuation was two-fold. Firstly, a weak ringgit would result in a higher cost of importation, which then can result in domestic inflation.
A weak ringgit can also help the nation’s exports as prices become cheaper since the ringgit has weakened against major currencies.
“The same is also true when the ringgit appreciates; it will result in a lower importation cost, which can help enhance the profitability of businesses whose raw material, for instance, is sourced from abroad,” he said.
However, he said that there is no assurance such businesses would lower their selling prices, adding that they will likely maintain those prices while enjoying better margins, as their cost of importation has declined, owing to a strong ringgit.
Additionally, he said a stronger ringgit could also spell trouble for exporters as their prices would become expensive in the eyes of international buyers.
“So there are always two sides to the coin. In the current context, the main issue now is why the ringgit does not reflect its true value and because of the ringgit depreciation, it might result in a higher cost of living, especially when we are the net importer of agri-food products. There is no quick fix to this problem,” he said.
“We know that our economy is open to trade, investment, and capital flows. On capital flows, we have seen that foreign investors have not really increased their holdings in our bonds and equities. Foreign ownership in the equities market is at 19.6% as of January 2024. It used to be more than 25% from 2013 to 2016.”
Similarly, he said foreign ownership in Malaysian Government Securities (MGS) is at 33.8%, but it hovered above 50% in 2016.
“Clearly, we need to understand why foreign investors are shunning our capital markets,” he said.
“Perhaps, implementing economic reforms consistently can help boost foreign investors’ confidence that investing in Malaysia will grow their wealth.”
He also suggested that the execution of economic reforms such as subsidies, liberalisation of industries, improving tax and pension systems, among others, has to be clearly communicated and gradually implemented.
“This is to avoid unnecessary confusion and shock to the general public. So it’s a long haul if we want to address the weaknesses in the ringgit value. Otherwise, we will continue to be firefighting and will only make things worse when policies are being implemented not at the right speed and uncoordinated,” Afzanizam said.
Another expert from a major investment firm suggests that the conventional narrative associating a nation’s economic health with its currency value may not hold true in the current global economic landscape.
‘Don’t judge economy based on currency’
Speaking on the matter, an analyst from the investment firm provided a contrarian perspective, emphasising that Malaysia’s economic situation should not be solely judged based on its currency performance.
Despite the ringgit’s decline, the analyst pointed out that Malaysia is not among the 61 economies currently facing elections, including significant players like Singapore, the US, the UK, and Indonesia.
Malaysia is also noted for its political stability in contrast to some others in the global arena.
Addressing the specific issue of the dollar-ringgit exchange rate, the analyst criticised the US for printing dollars without adequate backing, calling them out for engaging in policies that may not have global support.
The strict control over the ringgit-dollar exchange, established during the Asian Financial Crisis, was highlighted as a measure to safeguard against external influences and attacks on the Malaysian currency.
The analyst also drew attention to the Turkish Lira’s long-standing challenges but pointed out that in some instances, local currencies can still provide purchasing power for everyday items.
This raised questions about the necessity of relying on the US dollar in international trade.
“If you go to Istanbul, the Turkish lira buys you a lot of things, you can trade in Euro, or trade in crypto, and you can even barter trade, so why do we need the US dollar?”
On the topic of reserves, the analyst emphasised that Malaysia’s reserves include funds from entities like Petronas and the central bank, showcasing the resilience of the economy.
“There’s an argument the notion that a strong ringgit against the dollar is a precise indicator of a nation’s economic health,” he said.
“This is a very flawed way of viewing things.”
In terms of economic strategy, the analyst questioned whether efforts should be directed towards subsidising the ringgit and stressed the importance of a clear vision for the country’s economic direction.
“Does the country need to burn billions in (US) dollars just because it wants to show a strong ringgit standing? A strong ringgit versus the dollar is not the correct barometer of the economic health of a country,” he said.
Discussing the impact on the general population, the analyst highlighted that everyday Malaysians may not be significantly affected by the currency fluctuations, pointing out the stability in essential commodities such as rice.
However, the analyst expressed concerns about the government’s fiscal approach, urging a careful consideration of spending decisions, especially given the current global economic uncertainties. – February 22, 2024