Ringgit Dives to RM4.40 Against Greenback!

The ringgit has slid further to RM4.40 against the US dollar. This is the lowest since March 2020. Why? Because of hawkish stance by the US Federal Reserve (Fed) to tighten its monetary policy. The ringgit hit a record low on March 23, 2020, when it reached RM4.447. 

The current context is largely about higher interest rates in the US and relative inflation outlook. 

The Fed chair Jerome Powell said the Fed would keep raising rates until inflation comes down. They (central banks) are also likely to tighten monetary policy as inflation seems to be pervasive. Major central banks are in a tough spot as they need to weigh between rising inflationary pressures and economic growth. 

Recession may seem be the buzzword and that has resulted in higher demand for risk-free assets such as the US Treasury bonds. The export ban of agrofood-related products by certain jurisdictions is expected to amplify the extent of inflationary pressures. Hence, foreign exchange players would continue to remain in safe-haven currencies.

Prime Minister Datuk Seri Ismail Sabri Yaakob announced recently the Government would abolish APs for food imports with immediate effect to contain rising food prices. Previously, there were APs to import beef and cattle but these are no longer required and anyone can import whatever food items to ensure sufficient supply. Malaysia’s net food import is worth about RM55-60 bil annually. Given the scarcity of several food items due to the war in Ukraine and sliding ringgit, the country’s annual food import price tag is projected to escalate.

It is in this context that BNM must lay-out a strategy to manage exchange depreciation, even with improvements in commodity prices. BNM’s usual statement is we will “smoothen” any downward pressure on the ringgit. And again, we don’t have sufficient USD reserves to defend it.

Our reserves stand at USD115.6 bil as at 31 March 2022. Singapore has forex reserves at USD365.2 bil as at April 2022. This equals 8.7 months of retained imports. Foreign exchange reserves of the top 10 countries are shown below:

Top 10 countries: Foreign Exchange Reserves (USD)

It is remarkable that India, South Korea, Hong Kong who went through difficult periods previously have augmented their reserves. We don’t have sufficient reserves to ward-off speculators. They will attack our narrowly traded currency in uncertain periods. Then again we have serious structural issues.

It is in this context that the former PM, Mahathir has weighed-in by suggesting re-pegging the ringgit at RM3.80 to the U.S. dollar. He believes in fixed exchange rate and the gold standard. This ship left in 1971, and he failed to board it. Re-pegging will mean capital controls and will also drive foreign (and local) investments away.

What can BNM do? In the immediate, is to move OPR up by 1.0% which will create sufficient differential with U.S. interest rates, bring inflation down, set the tone that BNM is serious on inflation, and then focus on structural issues and supply disruptions. But will we do that?

References:

Ringgit dives to RM4.4 against greenback, lowest since March 2020! G Vinod, Focus Malaysia, 19 May 2022

Ringgit pegging not in Malaysia’s interest, poses ‘great risk’ – BNM governor, Syafiqah Salim, The Edge Markets, 13 May 2022