Wednesday, March 13, 2024

Ringgit: "See you at 5" didn't happen again

That was the line used to hyped the market into thinking ringgit will plunge further during the financial crisis back in 1997. Ringgit weakened from 2.50 level to hit 4.7958 in October 1998. 

Last yeat, it fell to a 25 year low of 4.7750 in October 2023. See you at 5 was heard again. Recently on February 20th, see you at 5 when it hit a 26 year low at 4.7965

The decline agitated the public as the spectre of 1998 reappear. Prime Minister and Minister of Finance Anwar Ibrahim, Economics Minister Rafizi Ramli and the Madani government took the brunt of the blame.

Premature accusation of failure to revive the economy were heard. This is despite the ringgit weakness and rising food prices are fiscal mess inherited from Mahathir 2.0 and the two subsequent PN governments. 

That seemed to be forgotten since fiscal reform came with increases in and wider coverage of consumption tax, new taxes for online businesses, and improvement on tax collection. Yet it is the same fiscal reform that is needed to strengthen Ringgit.

As of yesterday, it is interesting to observe that the outcry on Ringgit seemed to waned off

The narrowing interest rate differential still not realised yet and no confirmed signs of inflation waning off in US yet.   

Bank Negara seemed to take a hand-off attitude to the runaway train developing in the round-the-clock foreign exchange global market, in which 95% of the volume traded is made up of speculators and scalpers.

That was till PMX gave a strong hint to buck up by telling media to ask Bank Negara for a statement. Governor Rasheed Ghaffour eventually told media that Ringgit weakness was due to external factors and its currently undervalued, not reflective of the positive outlook of the economy

Though Bank Negara should have made their presence earlier and more frequently, the timely intervention worked to correct the situation. 

Finally, the government took effort to get the dollar held by GLCs and GLICs converted to ringgit. EPF alone could bring back RM35 billion worth of foreign currency. Petronas should be dealing in the market and not off market direct with Bank Negara.       

Nevertheless, AmBank Economic Research is forecasting ringgit to appreciate to 4.50 to the US dollar by year end. They are anticipating interest rate differential between ringgit and dollar to narrow. 

There was a tad of optimism on the economy, in which the fundamental is seen as intact and unlike advanced country, Malaysia will not face a recession. 

Its a far cry from the deluge of pessimism in the media - social and mainstream - weeks earlier when the currency almost touched 4.80 to the dollar.

Prior to the recent weakness, analysts were optimistic in their forecast of Ringgit at the end of last year. MIDF have been gung ho on Ringgit for quite a while. In January, they predicted 4.20 for end of the 2024. There was also MIER, AffinRHB, and many more.

AmBank forecast could be continuing where market consensus left off had it not for the latest hiccup. S&P shares a similar view to expect Ringgit to rebound by 9% despite the risk it will set new low. The usual bearish at the bottom and bullish at the top phenomenon. 

See you at 5 didn't happen again. Nevertheless, Malaysia still need to address its deteriorating current account due to balance of payment issue. 

There are labour policy issues that came with the minimum wage that is driving local businessmen abroad to Indonesia and Vietnam. 

Together with the capital outflow problem, the country is not attracting as much FDI as our neighbours. Tengku Zafrul proudly announced RM325 billion FDI, but since mostly are MOUs, there is scepticism as to how much will eventually be implemented.  

If 85% implementation rate remain, hopefully the current negativism on social media will dissipitate. More than economics, speculation and confidence of market participant is usually the bigger contributing factor to Ringgit.


For an in-depth analysis on Ringgit, reproduced below from Star Online article today:

Under control: A money changer in Ampang, Selangor. The government must act quickly to restore the people’s and investor confidence that it is able to manage the impact of the ringgit’s depreciation on the economy, businesses and households.

Three considerations for the ringgit



Wednesday, 13 Mar 2024

SINCE the ringgit was de-pegged in 2005, it had strengthened by only 1% to end the year 2023 with an average exchange rate of RM4.5605 against the US dollar compared to RM3.7871 in 2005.

Throughout the 18 years (2005-2023), the ringgit had strengthened in seven years: 2006 (3.2%; RM3.6682 per US dollar), 2007 (6.7%; RM3.4375), 2008 (3.1%; RM3.3333), 2010 (9.4%; RM3.2211), 2011 (5.3%; RM3.0600), 2018 (6.6%; RM4.0351); and in 2021 (1.5%; RM4.1433).

During the nine years of depreciation, the ringgit fell the most in 2015, which saw it depreciate by 16.2% against the US dollar to average RM3.9055 from RM3.2729 in 2014.

This was influenced by a mix of external factors (economic shocks, the crude oil price crashed, the Federal Reserve’s (Fed) tantrum and normalisation of interest rates) and domestic concerns/issues (domestic economic growth prospects, inflation, 1MDB scandal, political uncertainty, and concerns about the fiscal deficit and debt).

Speculative forces and weak sentiments also played a part.

There were two distinctive periods displaying the ringgit’s performance since it was de-pegged in July 2005.

The ringgit had appreciated by 15.7% in 2005-2014, but reversed to depreciate against the US dollar since 2015, with the ringgit registering an average exchange rate between RM4.0351 and RM4.5606 against the US dollar in 2016-2023.

Despite Malaysia’s interest rate (as benchmarked by the overnight policy rate or OPR) was set at between 1.75% and 3.25%, higher than the Fed Funds rate (0.25%-2.50%) during the period 2015-February 2022, the ringgit mostly printed at least RM4 against the dollar, except for brief months averaging below RM4.00 before and during the 14th General Election (January-May 2018, April 2016, and January-July 2015).

A number of international and domestic developments probably explained a general weakening of the ringgit against the dollar.

> Global crude oil prices collapsed in 2014-2016, which had impacted the government’s oil-related revenue and oil exports, as well as dampened investors’ sentiment on the ringgit.

> The alleged embezzlement of 1MDB money between 2009 and 2012 went unchallenged until a full implosion in 2015. The revelations became a major political scandal in Malaysia, triggering investors’ concern and confidence, domestic protests and voters’ backlash.

> Domestic political uncertainties that have characterised Malaysian politics since the 14th General Election held on May 9, 2018, including four prime ministers, leading to unclear policy directions, loss of competitiveness and lower investor confidence.

> Malaysia’s economic fundamentals have somewhat weakened for some indicators amid a strong capitalised banking system and a deep capital market. Economic growth had slowed to an average of 3.8% per annum in 2015-2023 from 4.9% per annum in 2006-2014.

Except for some years of high headline inflation (2014, 2017, 2022 and the first half of 2023), inflation increased by 2.4% per annum in 2005-2019 and 2.8% er annum in 2021-2023 before sinking into price deflation (-1.2% in 2020), the Covid-19 pandemic year.

Fiscal deficits persisted; federal government debt increased by 10.4% per annum in 2005-2023 (end-2023: RM1.2 trillion or 64.3% of gross domestic product or GDP versus end-2005: RM198.7bil or 36.5% of GDP); federal government debt and liabilities stood at RM1.5 trillion or 82.3% of GDP at end-2023; national external debt too expanded by 10.8% per annum during 2005-2023 (end-2023: RM1.24 trillion or 68.2% of GDP; end-2005: RM197.7bil or 36.4% of GDP).

The current account surpluses had shrunk from a strong double-digit share of GDP in 2005-2011 to low-single-digit of GDP starting 2012, hitting 1.2% of GDP in 2023.

> There have been several major economic shocks on a global scale (2008-2009 Global Financial Crisis or GFC), 2020 Covid-19 pandemic crisis, 2022 military conflict in Ukraine, and the Israel-Hamas war in 2023), with repercussion effects on domestic economy via trade and financial channels.

Domestic interest rates were reduced during the economic shocks to stem severe economic downturn. During economic crises, investors generally shy away from investing into emerging economies’ asset class, including the ringgit, on the flight to quality and safe-haven assets.

> The Fed’s monetary policy stance will influence the US dollar and capital flows. The Fed had slashed interest rates and implemented quantitative easing during the 2008-2009 GFC, and the US dollar was bashed down.

It recovered when the Fed gradually returned to normalcy in 2015-2018. Since March 2022, the Fed has forcefully raised the Fed funds rate 11 times to 5.25% to 5.5% to fight the inflation, lifting the US dollar stronger.

First Consideration: Strengthening the foundations for growth

We reckon positive economic growth for this year, the challenge is to sustain quality and higher future growth prospects.

The foundations for future growth need to be strengthened by the urgency of policy and structural reforms to boost productivity, increase investment and business opportunities, improve education outcomes, enhance skill set, accelerate the climate transition, and make growth more inclusive, ensuring access to economic opportunities for all.

The government faces mounting fiscal challenges from persistent budget deficits and rising debt burdens as well as sizeable additional future spending pressures. A weak fiscal consolidation questions fiscal sustainability.

One welcome move is the enactment of the Public Finance and Fiscal Responsibility Act, which set the fiscal sustainability parameters (expenditure, fiscal deficit, debt and financial guarantee).

While some price and subsidy reform measures have started to be implemented in phases, stronger efforts are needed to contain spending growth and design a sustainable revenue stream, instead of ad-hoc revenue measures.

Second Consideration: Restoring economic agents’ confidence on macroeconomic variables

It has been long established that lack of confidence was one of the main reasons behind the financial and economic crises. Confidence is a self-fulfilling prophecy.

Therefore, the government and policymakers must act quickly to restore the people’s confidence and improve investor sentiment that it is able to manage the impact of the ringgit’s depreciation on the economy, businesses and households.

Constructive engagement through opening and maintaining channels of communication between the government and private sector can make an important contribution to enhance the confidence of economic agents.

As consumer confidence increases, their demand for foreign currency will decrease and the value of domestic currency will increase.

Third Consideration: Sustainable investment climate

The government has launched the Economy Madani Framework to make Malaysia a regional economic powerhouse; New Industrial Master Plan 2030 to drive manufacturing transformation; and the National Energy Transition Roadmap to facilitate and drive sustainable practices and green initiative.

Three successive years of substantial approved investments totalling RM906.7bil in 2021-2023 (RM228.1bil in 2019-2020), of which RM513bil or 56.6% of total was foreign investment. This suggests that Malaysia remains attractive to foreign investors.

The realisation of investments in the years ahead will boost the national output and income as well as generate jobs. For the period 2016-June 2023, the realisation of approved investments in the manufacturing sector was about 85%.

Strong execution of the plan and initiatives are critical to convince both domestic and foreign investors that Malaysia is firmly committed towards creating a conducive investment climate to attract high quality, durable investment and support sustainable and inclusive economic growth.

Transparent, consistency and predictable policy and market conditions not only help attract foreign investors but also help spur domestic investment. Remove barriers that may hinder equal opportunities for all.

There is the urgency of structural reforms to boost productivity, investment and labour market participation, and make growth more inclusive through improving technology and digitalisation outcomes, enhancing skills and talent development, and reducing constraints in the labour and product markets to foster healthy competition.

The bottom line is the ringgit exchange rate is one of the most important determinants of a country’s relative level of economic health and relative competitiveness in the terms of trade as well as the capital movements in terms of real rate of return on investment.

While exchange rates are determined by numerous complex external and domestic factors, the government has to offer compelling economic and investment propositions as well as strong corporate earnings prospects to lure more foreign and domestic investors into domestic asset classes.

As at end-January 2024, Malaysians (individuals and corporates) have placed RM247.4bil worth of foreign currencies deposit, equivalent to 10.4% of total banking system deposit, representing a big jump from RM53.5bil or 4.7% of total deposit at end-2010.

In addition to strengthening the shrinking current account surpluses and reducing services outflows, we have to strengthen the financial account (which measures foreign money flowing into the country and domestic residents’ money investing abroad).

There was higher repatriation of interest, profits and dividends earned by foreign direct investments to their parent companies and also on portfolio investment.

We also observed that Malaysia’s outward investment abroad have increased substantially to RM39.4bil per year in 2011-2023 from RM19.5bil per year in 1999-2010 while domestic residents’ portfolio outflows investing in equities, investible funds and bonds were larger at RM28.9bil per year in 2010-2023.

Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed are the writer’s own.


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