Bank Negara recently assured the forex market that it will intervene to stem excessive ringgit fluctuations. The statement was made following the ringgit’s continued depreciation against a number of currencies.
The problem is, the ringgit cannot be strengthened with the central bank’s intervention alone, despite the US$113bil (RM527.4bil) in international reserves. Had it been that simple, the ringgit’s long-term weakening that accelerated after 2014 – which some say was partly caused by the 1Malaysia Development Bhd corruption scandal – could have been averted.
There has been quite a blame game happening on the ringgit’s depreciation over the past several months. Economy Minister Rafizi Ramli says the weak ringgit is partly caused by the reluctance of some Malaysian exporters to repatriate their earnings to Malaysia. Some exporters who are paid in US dollars do not exchange the proceeds for ringgit and bring the amount back to Malaysia.
However, a bigger reason for the ringgit’s depreciation is the aggressive interest rate hikes in major economies to tame inflation. Since March 2022, the United States Federal Reserve has increased its interest rate, known as the federal funds rate, aggressively from the range of 0%-0.25% to 5%-5.25% currently. The Bank of England, meanwhile, has hiked its main rate from 0.1% to 5%.
In contrast, Bank Negara has only raised its overnight policy rate to 3% as compared to 1.75%, which was from July 2020 to early March 2022. The MPC in its recent meeting left the OPR untouched.
The more aggressive rate hikes in advanced economies have led to the outflow of funds from Malaysia, which in turn weakened the ringgit. Surprisingly, traders and speculators are not measuring real interest rate differentiation – it is negative in more advanced economies compared to Malaysia.
In addition, emerging signs that China’s post-Covid-19 economic recovery is losing its momentum has also impacted the ringgit’s direction. China is Malaysia’s largest trading partner. The ringgit has depreciated 2.4% against the yuan since February this year.
In September 1980, the ringgit was worth RM2.1110 per US dollar. The local note’s value crashed in the aftermath of the 1997 Asian financial crisis and has only briefly returned to below the RM3 mark. The ringgit ended the first half of 2023 at RM4.6675 against the US dollar on June 30. It seems that the ringgit has not managed to regain its shine despite reports about strong foreign direct investment (FDI) flows into the country annually.
Beyond political uncertainties, some argue that the ringgit’s under-performance is largely caused by persistent structural issues affecting the Malaysian economy.
One of the structural issues is the country’s high dependence on foreign workers, which the Statistics Department said there are 2.1 million foreigners working in various sectors up till June 2022 (undocumented ones could double that figure). These foreign workers, most of whom do not pay taxes in Malaysia, are a massive contributor to money outflows from the country in the form of salary remittances. In 2019, it is estimated that the foreign workers remitted RM31.2bil to their home countries. Five years earlier, in 2014, the value of remittances was only RM20.6bil. Indonesia is the biggest recipient of remittances from Malaysia. While there are Malaysians working abroad who remit their salaries back into Malaysia, the country has continued to see higher remittance outflows than inflows. This effectively puts pressure on the ringgit.
Another issue is the declining contribution of exports to Malaysia’s economy, with the country becoming more reliant on domestic consumption. For example, in 2000, the value of exports of goods and services was about 119.8% of Malaysia’s gross domestic product (GDP), according to the World Bank. By 2021, it had reduced to 68.8%. The size of imports relative to the GDP has also reduced in tandem, considering that a huge chunk of the imports were intermediate products that are used in the manufacturing sector to be exported later. In 2000, imports of goods and services were valued at 100.6% of the Malaysian GDP and by 2021, it declined to 61.7%. With net exports having a smaller influence on the economy, the ringgit no longer enjoys the same demand it used to have from the external environment.
Meanwhile, the country’s ever-increasing food import bill has also continued to exert pressure on the ringgit. In 2022, the food import bill reached about RM75.54bil, from just RM51.4bil in 2019. For the sake of comparison, Malaysia generated RM28.2bil in tourism income in 2022 by attracting 10 million international tourists.
While subsequent governments are struggling to improve the domestic self-sufficiency levels across different food classes, Malaysia continues to rely heavily on imported food items that leads to an increasing outflow of money. It is estimated that the food import value could surge to RM100bil by 2025.
As at end-2022, Malaysia’s direct investment abroad (DIA) position was recorded at RM607.5bil, according to the Statistics Department. DIA position refers to total stock of DIA at the end of reference period. About 68.4% of the amount comprises investments in equity and investment fund shares. In comparison, the FDI position in the country as at end-2022 was RM879.1bil.
The fact that Malaysia ranks high in illicit fund flows and many high-profile Malaysians have their wealth stashed abroad in offshore accounts makes the situation even worse. According to a report by Washington-based Global Financial Integrity, Malaysia lost between US$22.9bil (RM107bil) and US$33.7bil (RM157bil) due to illicit financial flows between 2006 and 2015.In addition to this, various exposes in the name of Panama Papers, Swiss Leaks and Pandora Papers, have uncovered the wealth owned by many Malaysian politicians and tycoons in offshore entities.
The outflow of unaccounted funds puts downward pressure on the ringgit, which is further impacted by net outflow of foreign funds from the local stock exchange. Between 2014 and 2022, Bursa Malaysia has witnessed annual net outflow of foreign funds in seven out of nine years. Interestingly, this coincided with the acceleration of the ringgit’s long-term depreciation.
For the first five months of 2023, the net selling of foreigners amounted to RM2.84bil, as compared to 2022’s full-year net buy of RM4.4bil. Market commentators have said that international investors have been dumping Malaysian equities as Bursa Malaysia loses its lustre.
Among the reasons causing foreign investors to leave are unappealing policies, low profitability of Malaysian public-listed companies and the lack of companies that offer growth prospects with high economic content such as green and energy-related projects.
The fact that Malaysia’s weightage in the MSCI Emerging Market index, which is used by international portfolio managers as a benchmark, reduced from a high of 4% in mid-2013 to around 1.4% currently also caused the reduced participation of foreign investors.
Foreign participation in Bursa Malaysia has dwindled to 20.2% in March 2023, as compared to 27.5% in May 2007.
Moving forward, the government has a lot on its plate to address the structural issues with the aim to steer the ringgit towards long-term appreciation trend.
Cabinet ministers would have to effectively reduce the reliance on foreign workers, improve the sophistication of Malaysia’s supply chain to enable the exports of high-value products and services as well as slash the food import bill, among others.
We have to make Malaysia the preferred investment destination for foreign funds. However, this is easier said than done as Malaysia sees emerging competition from many regional countries such as Thailand, Indonesia and Vietnam.
And if the “Green Wave” and the 3Rs continue, we have enough negatives to upset foreign capital flows and even domestic outflows. Meanwhile, this Unity Government has to have a 5-point plan, where priorities should be and how we are going to achieve it.
Reference:
Structural issues dragging down the ringgit, Ganeshwaran Kana, The Star, 1 July 2023
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