The stories of different currencies often unfold with distinctive narratives and outcomes. That is the case for the Malaysian ringgit (MYR) and the Singapore dollar (SGD). Both currencies have followed divergent paths shaped by economic, monetary, and trade factors. (This blog post is based on an article by Choon Leo Wang of fifthperson.com).
1. Monetary policies and central bank interventions
The Monetary Authority of Singapore (MAS) has adopted its monetary policy around exchange rates through a managed float exchange rate regime for the Singapore dollar. Unlike traditional central bank practices of directly impacting interest rates, MAS focuses on targeting exchange rates. This regime empowers MAS to intervene in the foreign exchange market and adjust the value of the SGD within a specified range against a basket of other currencies, referred to as the S$NEER (Singapore Dollar Nominal Effective Exchange Rate). By adopting this strategy, the MAS ensures stability and adaptability to market dynamics.
Singapore’s interest rates are market-driven and closely correlated to U.S. interest rates. Consequently, the Singapore dollar experiences less pressure in terms of yield differentials. This approach has contributed to the strength and resilience of SGD.
Source:
https://focusmalaysia.my
Malaysia, however, operates under a free-floating exchange rate regime for the ringgit. This means that the value of the ringgit is primarily determined by market forces, which makes it more vulnerable to external shocks. While a free-floating regime offers flexibility, it also exposes the currency to increased volatility and fluctuations.
For example, in 2022 the U.S. Federal Reserve implemented a robust policy of raising its interest rate by 425 basis points. It had a target range of 4.25-4.50% to tackle inflation. As a result, the increased returns on U.S. financial assets fuelled a surge in demand for these assets. This resulted a prolonged period of U.S. dollar appreciation. Consequently, the ringgit experienced depreciation against the U.S. — and Singapore dollar — throughout the year due to widening yield differentials.
It’s important to note that rate hikes in Malaysia have been relatively slower compared to other major currencies. BNM has made it clear that its mandate is to tackle inflation rather than focus on strengthening the ringgit. Consequently, it is unlikely that BNM will embark on an aggressive rate hiking path akin to that of the U.S. This approach is aimed at easing pressure on Malaysian citizens, as well as reducing the risk of defaults for businesses and homeowners.
2. Economic fundamentals
Throughout its history, Singapore has consistently demonstrated a robust and stable economy, characterized by remarkable GDP growth, low inflation, prudent monetary policies, and an inviting investment climate.
In contrast, Malaysia has faced challenges arising from its heavy reliance on price control mechanisms and subsidies. According to Dr. Apurva Sanghi, the World Bank’s lead economist for macroeconomics, trade, and investment, Malaysia stands out with one of the highest numbers of price-controlled items in the region. Notably, over half of the surveyed firms affected by these controls reported a 25% reduction in their production due to their inability to generate profits. These factors pose a threat to the efficiency and competitiveness of Malaysia’s economy, ultimately impacting the value of the ringgit.
The implementation of price controls restricts producers’ capacity to generate substantial profits, while subsidies fail to encourage the production of goods and services that align with consumer demand. Consequently, Malaysia has struggled to diversify its domestic production, leading to an increased reliance on imports in crucial product categories. This trend not only weakens the overall economy but also undermines the value of the ringgit, presenting further challenges to Malaysia’s economic stability.
3. Trade imbalances and productivity
Trade imbalances and productivity are crucial factors that can significantly influence currency exchange rates. Singapore has effectively diversified its economy, positioning itself as a global hub for finance, trade, and technology. Its impressive level of productivity has attracted foreign investments and fostered a robust export sector. In contrast, Malaysia, despite its prominence in manufacturing and natural resources, faces challenges associated with trade imbalances and a heavy reliance on low-value exports. The decline in commodity prices, such as palm oil and crude oil, has further impacted the sentiment surrounding the ringgit.
The economic recovery of China holds particular significance for the value of the ringgit, considering China’s position as Malaysia’s largest trading partner. The depreciation of the Chinese yuan, coupled with subdued optimism regarding China’s reopening, has exerted a noticeable influence. The decline in exports to China stands as a major contributing factor to Malaysia’s 1.8% contraction in exports during the first quarter of 2023.
Given Malaysia’s substantial trade exposure to China, the value of its currency is heavily dependent on China’s economic recovery. Consequently, developments in China’s economy and its currency can significantly impact the performance of the Malaysian ringgit.
4. Investor confidence and stability
Singapore has been fortunate to possess political stability, transparent governance, an efficient legal framework, and investor-friendly policies, all of which have created an attractive environment for businesses and investors. This stability fosters confidence in the Singapore dollar and leads to increased demand, resulting in currency appreciation.
Malaysia, despite maintaining relative political stability, has faced challenges related to governance concerns,corruption allegations, and policy uncertainties. These factors can erode investor confidence in the ringgit. Recent global uncertainties, such as the U.S. debt ceiling issue, the Russia-Ukraine conflict, and inflationary pressures, have further prompted some investors to seek refuge in safe-haven currencies like the Singapore dollar. Supporting this trend, a recent report by credit rating agency Fitch highlights that Singapore holds a AAA rating, while Malaysia is rated BBB+.
While a weaker Malaysian ringgit may bring some benefits to Singaporean shoppers enjoying cheaper trips to Johor, it is essential to consider the broader implications for both countries.
As Malaysia works through with the continuous depreciation of the ringgit, global investors remain careful to understand the impact of unfavourable foreign exchange rate movements. This can significantly affect returns. For instance, even if a stock yields a 10% return, if the currency depreciates by 10% against the investor’s local currency, the actual returns will amount to zero.
5. Malaysia needs to dismantle some existing policies
This is a political problem. Affirmative action is an added cost to enterprises and the economy. Policy changes in this respect need careful crafting. In addition, bureaucracy and red-tape have to be dismantled for the investment environment to blossom. Subsidies could be dismantled but the repercussions are immense on inflation. Targeted subsidies are difficult to implement. One way is to have higher windfall tax and widen the base to fund subsidies.
6. Illicit fund flows
Malaysia lost between USD22.9b and USD33.7b in illicit capital outflows from 2006 and 2015 (Focus Malaysia, 14 May 2022). More current figures are not available. But some Government agency or a special Task Force need to investigate the Pandora papers, Panama Papers and Paradise Papers that list Malaysian leaders and their family members on illicit capital outflows.
In the immediate is for BNM to work to stabilise the ringgit. In the longer term, Malaysia needs an overhaul of its current environment and processes for FDIs and DDIs to flourish.
Reference:
4 reasons why the Singapore dollar continues to strengthen against the Malaysian ringgit, Choon Leo Wang, The FifthPerson,
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