1996 seems like a completely different lifetime ago, especially if one were to look at the value of the Malaysian ringgit back then, before the Asian Financial Crisis of 1997, when the exchange rate of US$1 was around RM2.50. Compare that to the exchange rate of US$1 to around RM4.75 as of 7 April 2024, and the difference is not just night and day – it is planets apart! Of course, one can always say that exchange rates will fluctuate, but what makes recent events so alarming is that the value of the ringgit is now lower than the RM4.50 to US$1 point it plunged to at the start of the ’97 Crisis. International Business Review examines the ringgit’s current situation and its impact on the overall direction of Malaysia’s growth and economy.
It should be noted that the ringgit is not the only Southeast Asian currency that has weakened against the US dollar, as most major regional currencies have seen their value drop over the past 12 months. It is a matter of how much they have gone down by. As can be seen in the chart (Fig 1), there is no denying that the ringgit has been the worst performing major Southeast Asian currency to date. In which case, we need to ask, why is that so?
Are Interest Rates to Blame?
One possible reason stems from the fact that over the past year, many central banks have hiked interest rates. This follows a spate of interest rates hikes by the Federal Reserve, starting from March 2022, which took the rate from a low of 0.08% to 5.33% as of end 2023. All in all, the Federal Reserve increased interest rates a total of 11 times – an action it started taking following the invasion of Ukraine by Russia and the subsequent inflationary pressures that followed.
A hike in Federal Reserve interest rates increases demand for the US dollar as dollar-denominated bonds become more attractive owing to the prospects of higher yields. In order to ensure that their currencies are not left behind, other countries central banks will often mirror that increase.
For example, the European Central Bank steadily increased interest rates across the board for deposit facilities, main refinancing operations and marginal lending facilities starting 2022. Take the deposit facility starting out with a 0% interest rate July 2022, hiking up to 0.75% September 2022, settling at 4% as of September 2023. In a similar timeframe, the Bank of England had a 1.25% rate in June 2022, climbing to 2.25% in September 2022, to a 5.25% rate as of August 2023.
Malaysia however has not dived into that pool. Instead, Bank Negara Malaysia (BNM) has kept its key overnight policy rate (OPR) steady at 3% since May 2023, having previously raised it from 2.75%. For the Malaysian central bank, the bigger concern is economic stability rather than inflation, as there are fears that higher interest rates could result in more businesses facing difficulties in repaying loans. Given that the country had recently exited the COVID-19 pandemic, things are not yet stable enough to rock the boat.
The Effects of Falling Export Demand
Interest rates discrepancy is just one of the issues affecting the ringgit’s performance. Other external macroeconomic issues outside Malaysia’s immediate ability to address include a less-than-robust economic recovery by China, which has led to a drop in demand for Malaysian goods thus weakening the ringgit. At the same time, concerns over a global economic slowdown have resulted in people going towards traditional safe haven currencies such as the US dollar, Singapore dollar, euro and Japanese yen.
It may seem odd to say that Malaysia’s exports have declined, given that in 2023 the Malaysia External Trade Development Corporation (MARTRADE) reported that the country’s trade value exceeded RM1 trillion for the third consecutive year, with the country enjoying a 26th straight trade surplus.
Yet closer inspection reveals a different story, as exports have declined by 10% while imports increased by 2.9% year-on-year from 2022 to 2023. The highest increase in imports being that of crude petroleum, which went up by 57.8% in 2023.
Given that the ringgit has been devalued from 4.17 to the US dollar as of January 2022 to 4.70 to the US dollar as of January 2024, this means that we (Malaysia) are paying more for more imports while receiving less for exports, which have dropped.
Furthermore, it should also be noted that Malaysia is yet to be a 100% self-sustaining nation. The manufacturing industry’s increased costs in production when importing materials can easily lead into a cascading effect where the burden eventually becomes unsustainable. Goodyear is one of the latest to undergo restructuring, shuttering its Malaysian manufacturing plant in Shah Alam after over 50 years. The company had been operating at a loss since 2017.
A Silver Lining
One question which has been asked regarding the impact of the ringgit’s decline is whether or not it is affecting confidence in Malaysia. According to Prime Minister, Datuk Seri Anwar Ibrahim, the answer is a resounding “No!”. Speaking in February this year, he pointed to indicators such as incoming investments, positive unemployment data and solid growth rates, saying “If confidence is low due to the ringgit, we would not have attracted these investments.”
On paper, foreign investments in Malaysia have seemingly gone up, despite the woes of the ringgit. According to the US Department of State’s Investment Climate Statement for Malaysia, US$36.9 billion (around RM163.33 billion at RM4.42 to US$1) in FDI was made in the country for 2022. Then, we have the Malaysian Investment Development Authority (MIDA) recording a 15.3% increase in FDI, seeing over US$41 billion (around RM188.37 billion at RM4.59 to US$1) worth in 2023 from 2022. Overall, Malaysia saw a 23% increase of approved investments, amounting to RM329.5 billion (around US$69 billion).
Strengthening the Ringgit
So, what can be done about the ringgit? One possible answer is, as Atish Ghosh, Division Chief in the International Monetary Fund’s (IMF) Research Department, puts it “sterilised intervention”.
This intervention often comes down to selling off foreign assets to buy one’s own currency, or more subtly influencing the ‘flow’ to create the impression of strengthening (or weakening, if it is so desired) of the exchange rate. Atish, however, notes that, with regards to major currencies like the US dollar, Japanese yen and euro, such methods require coordination among central banks if it is to succeed.
Historically, BNM has taken more direct interventions to prevent drastic devaluation of the ringgit. Offshore trading of the ringgit was banned to curb speculation in light of Donald Trump’s 2016 US Presidential election victory.
And who can forget what then Prime Minister Tun Dr Mahathir Mohamad did in 1998 during the Asian Financial Crisis, when he pegged the ringgit at 3.80 to the US dollar and imposed capital controls restricting the offshore trade and movement of the ringgit. These measures have been credited as helping to stabilise the ringgit during those dark days and spare Malaysia from having to implement harsh IMF reforms.
But could such a strategy work again? A fixed rate sounds like the ideal catch-all solution. However, the economic conditions differ, as Finance Minister II Datuk Seri Amir Hamzah Azizan explained, when the ringgit was pegged in 1998, the stock market had plunged by 76%, and foreign debt was more than 16% of GDP.
Comparatively, the start of 2024 saw a 6% rise in the stock market and foreign debt kept at 1-2%. Furthermore, BNM has reserves of around US$114 billion compared to US$26 billion in 1998. So, things now aren’t as dire as then.
Also, we should also take into account that one of the apparent reasons why Datuk Seri Anwar Ibrahim was unceremoniously sacked as Deputy Prime Minister and Finance Minister in 1998 was because he opposed pegging and capital controls. It would therefore be the height of irony should he, as Finance Minister, decide to sanction one of his arch-nemesis’s pet policies.
With all that said, we should note that any measure to check the slide of the ringgit would only be temporary, and that once it is removed, the ringgit will be subject to the same macroeconomic pressures.
The only way to ensure the long-term value and security of the ringgit is to ensure the sustainable economic development of Malaysia. And that’s because all countries with a strong currency have one thing in common, they enjoy strong investor confidence in their economies. If Malaysia wants the same for the ringgit, then it has to take steps to really shore up investor confidence. No ifs and buts about it.
