Impact of Money Supply and Fiscal Management on the Ringgit

The price of money is influenced by its supply, hence, a stable currency with appropriate money supply growth requires well-managed debt levels and a healthy fiscal position. (This article is based on a MARC Ratings report).

Over the past decade (2012–2022), Malaysia’s broad money had been growing by 4.9% per annum and exceeded the nation’s real economic growth rate of 4.1%. Additionally, Malaysia’s 10-year average (2013–2022) broad money-to-GDP ratio was 129.8%, higher than the ASEAN-6 median of 10-year averages of 117.3%. This in theory means we will continue to have inflation. Real GDP is a lower than nominal GDP, after accounting for inflation.

Malaysia’s low interest rate environment contributed to a preference for borrowing and credit creation. From 2013 to 2022, Malaysia’s private debt-to-GDP ratio had been relatively high, averaging 121.8% against the ASEAN-6 median of 10-year averages of 112.4%. This may partly be attributed to Malaysia’s significantly higher household debt of 85.6% during this period, against the ASEAN-6 median of 54.4%. While Malaysia has a resilient financial system, encouraging savings instead of borrowings may contain excess credit creation and improve capital availability for future investments. 

Low interest rates are positively correlated with money supply growth and the government’s expansionary fiscal policies. Persistent fiscal deficits and missed targets have led to Malaysia’s government debt-to-GDP ratio reaching close to the statutory debt limit of 65% (2023: 64.3%). High public debt levels raise the perceived country risk, leading to portfolio outflows and a weaker ringgit.

In addition, fiscal expenditures need to be allocated for capacity building rather than current expenses. Of note, development expenditure as a percentage of total government expenditure in the past decade (2013–2022) decreased to 17.5% compared to that of the previous decade (2003–2012) of 22.8%. During the same period, in terms of operational expenditures, the share of emoluments experienced the largest increment, from 27.7% to 33.0%; followed by pensions and gratuities (from 6.9% to 10.1%); and debt service charges (from 10.3% to 12.9%). Furthermore, the government’s plans of hiking civil servants’ salaries may hamper fiscal consolidation efforts. Therefore, new initiatives are required to improve tax revenue and reduce the deficit. That will help ringgit appreciation.

The key to all of this is the real interest rate differential. Unless we address this, it is not going to help the ringgit appreciate. BNM is fully aware and has been trying to balance growth and interest rates. And so long as inflationary pressures remain, interest rates will not be on a downward trend.  That’s the current case even for the U.S.

Reference:

Ringgit realignment (part 4): Money supply and fiscal management, MARC Ratings Berhad press announcement, 30 May 2024