Weakening Ringgit, No Reason to Sweat? Really?

 The ringgit’s historical low against the Singapore dollar is due to the latter tracking the movement of the US dollar. The ringgit hit a historical low at RM3.55 against the Singapore dollar on 7 February after closing at RM3.54, while also hitting RM4.76 against the greenback. Singapore manages its monetary policies via the foreign exchange, which means when the US dollar strengthens, so does the Singapore dollar. This is to prevent implications of inflationary pressure, bearing in mind that a majority of its basic necessities are imported.

Singapore also has a huge reserve (USD336.8b) and fiscal surplus, unlike Malaysia which has foreign reserves of USD110b and has been in fiscal deficit since the 1998 Asian Financial Crisis.

Source: https://www.imoney.my

If the government puts its mind to achieving fiscal discipline, will we be back on the right track? Really? The other argument is a weaker ringgit is good for exports.

What we have is negative real interest differential with the U.S. The U.S. has its Fed Fund rate at 5.25% to 5.5%. U.S. inflation rate is at 3.1%. The real interest rate is around 2.2%. For Malaysia, our OPR is at 3.0%, while annual inflation rate is at 2.5%.  The real interest rate is therefore 0.5%. So, where do you think the money will flow? From a low real interest rate environment to a higher real interest rate country, financial centres like New York or London will thrive.

And what must we do? OPR must be at 4.75% or inflation drops to 0.75%, which unlikely in the immediate term. Why? With electricity and water tariffs going up and net food imports higher, our inflation rate is likely to be at 3-4% soon. Madani Government waffles when real issues are not addressed. That’s our tragedy!

Reference:

Weakening ringgit, no reason to sweat, say experts, Lydia Nathan, The Star, 8 February 2024