Malaysian Ringgit: Fixed or Floating?

2019 could be a really difficult year for the Malaysian Ringgit (“MYR”).  We are vulnerable to both external and internal forces including trade; sentiments of short-term investors/ traders; interest rate and inflation differentials; movement of FDI; and also aggregate domestic demand – public/ private investment and consumption.

The recent decline of the MYR because of the potential downgrade of Malaysian bonds by FTSE Russell in its World Government Bond Index.  The potential capital flight could reach RM33 billion.  And foreign holdings of Government debt has been on the decline since 2016 – from 30.6% to 23% in 2018.  Then we have our honourable PM adding to the mix by suggesting a fixed rate regime in the event of a meltdown.

Fixed or pegged rates are not new.  But are they something we should yearn for?  MYR pegged to USD for example gives currency stability.  Foreign direct investors know the currency’s worth and there is no wild swings in the currency’s value.  China keeps its rate in a tight 2 percent trading range around its value.  But it can be expensive to maintain – enough foreign reserves to manage the value.  For China, that is not a problem.

Historically, no one system (fixed or floating) has operated flawlessly in all circumstances.  Probably, the best reason to adopt a fixed rate system is when the central bank is unable, for whatever reason, to maintain a prudent monetary policy.  Otherwise, the floating rate system proves better.  More than USD5 trillion is traded in the currency markets on a daily basis (2018).  Malaysia has stayed on a managed float-basis as we are an open economy and well connected to global financial flows.  We need to remain on this basis, if we are to be part of the world economic system.  But what is MYR’s outlook?  NO one really knows – but one could venture to suggest for 2019, 2020 and 2021 it could be follows:

The above is not a forecast but a range that reflects after “morning coffee”.