Unrealistic for Ringgit to Hit RM5 to USD1?

Bank Negara Malaysia (BNM) has dismissed concerns of the ringgit hitting RM5 against the US dollar. They view it as unrealistic as there is no crisis at hand. When the ringgit levels moved from RM2.5 to RM3 to RM4, there were issues like the Asian Financial Crisis. BNM remains confident in its ability to manage fluctuations in the currency. In fact, BNM sees the ringgit may strengthen to RM4 against the US dollar if the uncertainty recovers quickly. 

But what ails the ringgit?

The economy grew at an average annual growth rate of 7.3% from 2000 until 2020. Isn’t that a factor for exchange rate appreciation? What is most disappointing to the man on the street is that after 25 years since the Asian Financial Crisis (AFC), the local currency is now weaker than what it was during that turbulent period. To many on the street, the sustained weakness of the local unit is perplexing, given the local economy has recovered from the crisis and the gross domestic product (GDP) had grown steadily from RM356.4bil in 2000 to RM1.4 trillion in 2020, an average annual growth rate of about 7.3%.

Some say the uncertainty over the US debt ceiling drove forex traders to bid up the greenback to a six-month high against the local unit at RM4.6366 at the end of May despite Bank Negara raising its overnight policy rate by 25 basis points to 3% in early May. That helped narrow interest rate differentials and support the ringgit but not for long. 

In the near term, the country’s trade balance hasn’t improved as much as what Malaysia’s terms of trade indicated in 2022 due to a surge in domestic demand for imports.

Moderating commodity terms-of-trade are likely to impact commodity exports, while manufactured goods exports have moderated due to slower global growth. The local unit initially appreciated on China’s reopening optimism but growth momentum there has softened compared to market expectations. Interest-rate differentials continue to widen against the ringgit. There is also some political uncertainty heading into key state elections in July and investors might wait for more clarity on politics and fiscal reforms post-elections before turning more positive on the ringgit.

While it is undeniable the ringgit’s weakness against the US dollar is due to a cocktail of factors, its sustained decline over the past decades is beyond Bank Negara’s control.

Concerns about political stability, the delayed overhang reforms, worries about fiscal and debt sustainability push up not only the currency and equity risk premium, but also the volatilities of the ringgit induced by a two-way capital flow on the back of investors concerned about the government’s political commitment of making the reforms happen. (This is the view expressed by the executive director of the Socio Economic Research Centre.)

Malaysia has a managed floating exchange rate, which means that movements in the ringgit exchange rates are determined by the demand and supply of the ringgit in the forex market. Hence, on a cross-rate basis, the ringgit has weakened more against some regional peers, as they have weakened relatively less against the US dollar compared to the ringgit. Its weakening against the Singapore dollar has gained particular attention, as some 40 years ago, the exchange rate was almost at parity.

The current administration should work towards reform of the political system, institutional and economic revamp to enhance Malaysia’s resilience and competitiveness in trade, doing business and attracting investment.  That, in turn, would help make the ringgit a far more stable and stronger currency in the future. Meanwhile, parents who have kids studying abroad have to fork-out more and so do importers of good items and intermediate goods.

References:

BNM: Unrealistic for ringgit to hit RM5 against US dollar, S Birruntha, New Straits Times, 

8 June 2023

What ails the ringgit, Bhupinder Singh, The Star, 3 June 2023