“See You at 5”

There was an expression during the Asian Financial Crisis (“AFC”) of “see you at five”, this was when the ringgit to the dollar was headed south and before capital controls was imposed. The weakening ringgit have led many to believe that this is possible, especially when the Fed is hawkish.

But the ringgit is firmer (year-to-date) against the Japanese yen (12.5%), British pound (7.2%), South Korean won (7.1%) and marginally higher (0.9% to 3.8%) for the yuan, baht, Philippines peso and the euro.

Over the long-term (10-15 years) its relative performance is shown in the chart below:

While the picture looks respectable over a 5-year period, it looks depressing over the 10-15 year period (see Chart 2). We have collapsed by almost 50% to the U.S. dollar, over the last 10 years. Other significant declines are against Chinese yuan (34.7%), Singapore dollar (24.4%) and the Thai baht (24.4%). The ringgit has slid from RM3.05 to the USD in 2012 to RM4.53 by September 2022.

On a Real Effective Exchange Rate basis, the ringgit is undervalued by 16.8%. A fair value is approximately RM3.89 to the USD. But this is far from its current position and expectations of some others (The Economy Forecast Agency) as shown below:

By June 2024 (or sooner?), we could hit RM5 to the dollar. In fact, one former Minister of Finance thinks it could be RM5.50 to USD by year end. But we can change this scenario if we are willing to consider the following:

• Raise OPR by 0.75% to 1% in November;

• Stem outflow – remittances/overseas investments without capital controls;

• Repatriate funds from investments made overseas;

• Improve quality of local education and stem outflow for student fees/living expenses;

• Use import substitution to reduce import of food products (RM60bil or more);

• Provide more job opportunities for Malaysians in the STEM area;

• Declare “war” (jihad) on corruption;

• Reduce scale of “shadow” banking;

• Ease doing business in Malaysia for FDIs and DDIs;

• Halt flip-flop policies; and 

• Actually practice “Keluarga Malaysia’.

Can we do that?

Reference:

Whither the ringgit? Pankaj Kumar, The Star, 17 September 2022