Why the Ringgit Cannot Close the Gap on the Singapore Dollar!

The Singapore dollar hit an all-time high against the ringgit in early May, as Malaysia remained slow to respond in the post-pandemic recovery phase. Some may say a weakened ringgit would attract Singaporeans to come to Malaysia and spend, this is a fool’s argument. Why? It suggests that we should go the way of the Turkish lira, Sri Lankan rupee or the Zimbabwe dollar. In all cases, it is not something we can look forward to.

The Singapore dollar has steadily increased in value against the ringgit since March. (Xe.com chart). A weaker ringgit naturally means that imports would be more expensive and will lead to higher imported inflation while a strong local note means higher purchasing power when abroad. Malaysia’s high food net import bill (RM60b), increases further the weakening of the ringgit.

Singapore’s currency has been benefitting from a combination of a safe haven status, a risk-off environment amid rising global uncertainties, and tightening monetary policy by Monetary Authority of Singapore (MAS). A further escalation in the Russia-Ukraine war, the rise in inflation and economic uncertainties, as well as monetary policy differences will benefit the Singapore dollar.

There is an interesting argument that had Malaysia not terminated the Currency Interchangeability Agreement (CIA), 1967 in 1973 our ringgit would be at par with the Singapore dollar. That will not be the case, because Singapore would have terminated the agreement because of the divergence of domestic policies and external impact on the two currencies. It would be tension between BNM’s objectives and that of MAS.

The immediate reasons for the widening gap between the ringgit and the Singapore dollar include: relative GDP growth; inflation; interest rates, trade balances; speculative forces, currency flows/capital account; money supply; forex reserves, productivity changes, consumption and private investment, amongst others.

But can we ever catch up with the Singapore dollar? The answer for today is no, unless we are prepared to do the following:

• Good education for the future-not focused on language and narrow political pursuits;

• Harmony amongst all Malaysians – not “ketuanan”, religion and race; 

• Innovative (and creative people) with R&D funding for commercialisation of inventions;

• Strong infrastructure/connectivity;

• Large savings, strong reserve currency and low foreign debts;

• Competitive and increasing share of trade; and

• Leadership in inclusive development with no tolerance for corrupt practices.

I have summarised and paraphrased the key points of Ray Dalio in his book “Principles for Dealing with Changing World Order”. But are we prepared to take those giant steps?

References:

Can the ringgit close the gap on the S’pore dollar? Nicholas Chung, Free Malaysia Today, 

15 May 2022

Principles for dealing with the changing world order: Why nations succeed and fail, Ray Dalio

SGD1 will always be worth RM1 if Malaysia didn’t terminate this agreement with Singapore, 

(https://newswav.com/A2203_gFwcb8)