The interest rate differential in favour of the US dollar and it’s safe haven status will continue to keep USD strong. This is until inflation expectations and interest rates projections peak and policymakers start to roll back measures.
The ringgit closed lower at RM4.65 against the dollar on 4 October 2022. More gains for the USD could be on the cards. The ringgit now having crossed 4.60 levels, it is now expected to weaken to 4.65 in the near term.
The local unit has depreciated by about 12% against the greenback since January 2021. In comparison, it fell by about 27% against the dollar over a 36-month period in 2014-2016 when crude oil prices crashed and from the Fed tapering action. The ringgit also fell by some 28% against the dollar during a 10-month period following the Global Financial Crisis and 43.7% (from April 1998 to January 1999) during the Asian Financial Crisis in 1997 and 1998.
The weak ringgit in the meantime would benefit export-oriented industries such as palm oil producers and, electrical and electronics manufacturers while costing domestic market oriented industries with high import content.
Despite Malaysia’s annual food imports over RM60bil and core inflation in August rising to 4.7% driven by higher food prices, inflationary pressures on consumers could be limited as final consumption goods account for about 9% of the overall consumer price index basket.
Cost pressures will likely be felt via imports of intermediate goods which account for some 55% of the country’s imports. US dollar debt, meanwhile, is low at 5% of total external debt.
Current projections imply another 125 basis point tightening over November and December which would take the Fed fund rate to the 4.25% and 4.5%. The consensus is for Bank Negara to raise its overnight policy rate (OPR) by another 25 basis points in November.
Is this enough? No, another 0.25% rise is not going to stem the ringgit’s decline. It has to be significant and impactful to be meaningful. Why doesn’t BNM do it? It is into “growth with stability” mentality which means measured and “behind the curve” increase. What is the upshot? Many countries in Asia face outflow of funds with the Fed’s actions. Can it lead to the Asian Financial Crisis 2.0? Yes and no. Yes, if the outflows damage markets which lead to a contagion. No, many Asian central banks hold higher foreign reserves which could stem outflows.
In the immediate, it is necessary to follow the U.S. in “upping” the rates or at least to keep the interest differential as low as possible. In the medium to long-term, develop an Asian dollar backed by rare earth, commodities and other reserves as the new reserve currency for the region.
Asia needs a central bank like the ECB for Europe. Many have also asked what if China dumps its reserves in U.S. Treasuries – that’s over USD 3 trillion! China will not do that in the immediate because it has to sell the dollars it receives for another reserve currency – the yuan? This is not feasible. It will prefer an Asian Central Bank and a reserve currency like the proposed Asian dollar before it dumps U.S. Treasuries. That may end the hegemony of the USD. A prospect that the U.S. will oppose strongly and call it “economic terrorism”.
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