Is Ringgit’s Misfortunes Driven by Investment Flows Only?

 The ringgit continues to head south, vis-a-vis the mighty US dollar in recent months.

The differential in the US interest rate and Malaysia’s is also well documented. The real interest differential could be neutralised with OPR moving upward by 0.25%. China’s loose monetary policy has had a damaging impact on the Malaysian currency. The Chinese yuan, as recent as two months ago, was flirting at near 16-year lows.

Malaysia continues to show positive current account and overall balances, the breakdown of our balance of payment account shows a different picture. Based on data provided by Bank Negara, Malaysia recorded a net outflow of RM254.6bil in its financial account between 2010 and September this year as can be seen in Chart 1, with the biggest outflow seen in 2014 where some RM80bil left Malaysian shore and in 2020, when some RM77.4bil left the country.

Malaysians investing overseas is not new. Statistics for the third quarter of 2023 (3Q23) showed that domestic investment abroad (DIA) totalled some RM13.4bil, bringing the year-to-date total to RM22.5bil. Compared to a year ago, when DIA stood at RM30.1bil, the amount for the first nine months was lower by RM7.6bil or 25.2%.

With net foreign direct investment (FDI), which totalled RM7.2bil in 3Q23 and RM22.3bil in the first nine months of 2023, direct investment registered a net outflow of RM6.1bil and just RM0.1bil in 3Q23 and in the first nine months of 2023, respectively.

This is a huge decline compared to the first nine months of 2022, where direct investment registered a net inflow of RM25.2bil, thanks largely to a strong net FDI of RM55.4bil against DIA of RM30.1bil.

For 3Q23 alone, Malaysia recorded a portfolio outflow of RM14.1bil, of which some RM15.4bil were related to outflows carried out by residents while non-residents recorded an inflow of RM1.3bil. The 3Q23 outflow was a strong reversal of the RM0.5bil inflow that was recorded for the same period last year. For the first nine months of this year, Malaysia saw total portfolio outflows of RM39.3bil, a RM10bil year-on-year increase from the outflow of RM29.3bil in 2022. In terms of breakdown, residents recorded an outflow of RM41.9bil, while non-residents recorded an inflow of RM2.6bil.

Malaysia is fortunate to be running huge trade surpluses which have helped the nation to record consistent current account surpluses. The nation continues to see deficits in the services sector and primary and secondary incomes. 

There are significant uncaptured outflows, which is perhaps a reason for the ringgit weakness since 2010 when the ringgit was then trading at about RM3.20 to the US dollar. In addition, there have been numerous studies done on the impact of 1Malaysia Development Bhd on the Malaysian portfolio flows and clearly, the flows seen in DIA and FDIs show that DIA accelerated post-2015, which probably also explains the impact on our ringgit.

We need to reverse DIA for a short period, to stabilise and strengthen the ringgit with a Tobin tax (or an “exit” tax). Why? Imported inflation emanates from net food import of RM70-75 billion annually. Then we need political stability, promised reforms effected and reduction of bureaucracy for foreign investments.

So, it is having an interest rate differential in our favour, positive trade balance/current account balance, net inflows (investments), budgetary surplus instead of perpetual deficits, reduction of national debt of RM1.5 trillion and other related areas that will change ringgit’s performance against the dollar.

Reference:

Ringgit’s misfortunes driven by investment flows, Pankaj C. Kumar, The Star, 25 November 2023