PETALING JAYA: A weak ringgit is a bigger problem today than it was two decades ago.
As the contribution of exports to Malaysia’s economy has declined over the last 20 years while imports of food items have increased aggressively, the benefits of a weak currency are diminishing.
Economists have argued that a sustained depreciation of the ringgit would worsen imported inflation, affecting the purchasing power of households and businesses.
Ahead of the elections in six states – Kedah, Kelantan, Terengganu, Penang, Negri Sembilan and Selangor – the soft ringgit has also put the administration of Datuk Seri Anwar Ibrahim in a bind.
To be fair, the ringgit – despite reports of continued foreign direct investment (FDI) flows into the coutnry – has been on a long-term weakening trend against the US dollar since 2014.
An analyst told StarBiz that the acceleration in the ringgit’s long-term downtrend coincided with the outbreak of the 1Malaysia Development Bhd corruption scandal.
It is typically believed that a weak ringgit will boost economic growth as it will make Malaysian-made goods cheaper and in turn, lead to stronger exports.
However, the influence of exports has been reducing, with the economy becoming more reliant on domestic consumption.
In 2000, for example, the exports value was at 119.8% of the country’s gross domestic product (GDP), according to the World Bank.
By 2021, it had reduced to 68.8%.
The size of imports relative to the GDP has also declined in tandem, considering that the imports were intermediate products that were used in the manufacturing sector to be exported later.
In 2000, imports were valued at 100.6% of the GDP and by 2021, it had declined to 61.7%.
With exports having a smaller influence on the economy, this challenges the decades-long narrative that a weak currency is beneficial to the country.
Managing director of Datametrics Research and Information Centre Pankaj Kumar said the impact of a weak ringgit on the industry would depend on the percentage of imported raw materials that makes up the finished goods produced in the country.
It also depends on whether the manufacturers are “100% exporters”.
“If you are exporting in ringgit terms, the net impact will also depend on whether you are able to pass on the foreign exchange costs due to the currency’s weakness.
“If you are exporting to China, Japan, and in yuan or yen, unless you are able to price your product higher, the net impact may be diluted.
“It also depends on the bargaining power that Malaysia exporters have for the products they are selling vis-a-vis other producers selling to the same export market,” said Pankaj.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the ringgit has structural issues.
“Perhaps, by looking at the balance of payment it can give us some clue on how we can address the problem in a more holistic manner.
“The widening in trade deficits in the agrifood sector indicates a serious gap despite Malaysia having vast and fertile land.
“The rise in overseas remittance by foreign workers also indicates the country’s high dependencies on them.
“So, clearly we need to look at our labour market since the current pool of local talent cannot be absorbed effectively,” he told StarBiz.
Nevertheless, Mohd Afzanizam argued that the country should not be “too fixated” on the current currency fluctuations, pointing out that they are predominantly dictated by external factors.
On June 27, Bank Negara’s Financial Markets Committee said the external environment was the main driver of the ringgit’s weakness.
However, it expects the ongoing measures by the government to support the ringgit.
The central bank, which sat on international reserves worth US$113bil (RM527bil) as of June 15, also reaffirmed that it would “intervene” to stop excessive currency fluctuations.
Socio Economic Research Centre executive director Lee Heng Guie said the strength of the ringgit would have direct and indirect implications on the imports of consumption, intermediate and capital goods.
While consumption goods make up only 8% of total imports, he said the impact would be more prevalent under the prolonged period of elevated cost environment.
“Directly imported consumption goods, including fresh food items, dairies and processing food will be more costly.
“Producers importing raw materials have to bear higher costs and increase the price of the final goods.
“On average, a 5% depreciation of the ringgit to the US dollar will lead to a between 0.1% and 0.3% impact on core inflation,” he said.
Since February, the ringgit has declined by 9.51% against the US dollar, 12.98% against the British pound and 10.63% against the euro.
Across the region, the ringgit also fell by 6.75% against the Singapore dollar, 9.76% against the Indonesian rupiah, 8.25% against the Philippine peso and 1.67% against the Thai baht during the same period.
The environment has exerted significant pressure on the country’s ever-increasing food import bill.
In 2021, the food import bill reached RM63bil from RM51.4bil in 2019.
While subsequent governments struggled to improve the domestic self-sufficiency levels across different food classes, the weak ringgit would adversely affect the man in the street especially those from the lower-income households.
According to Mohd Afzanizam, there is a positive relationship between food imports and the domestic food prices.
“In that sense, the transmission from the exchange rate to food prices is quite effective.
“However, the role of subsidies and price control can to some extent, delay the impact,” he added.
There are also concerns on whether the weak ringgit and the lack of trust in the currency’s direction would force foreign investors to pull out their cash of the country.
Lee said portfolio investment and foreign direct investment in Malaysia are not determined solely by the exchange rate factor.
Other important pull drivers, according to him, are credible macroeconomic policies, political stability, economic growth and corporate earnings as well as a favourable investment climate.
“Portfolio investors could consider buying ringgit assets such as equities and they could potentially make currency gains if the ringgit appreciates.
“Some may liquidate their portfolio, hoping to buy back later if it takes a view that the ringgit may depreciate further.
“For foreign investors, their investment horizon takes a longer view perspective and hence, they will not act hastily,” he said.
Pankaj, meanwhile, said US dollar-based investors are “sitting at a loss now”, given the weak ringgit.
“There could be trigger points for such investors to reduce their exposure,” he added.
The latest statement by Bank Negara’s FMC seemed to suggest that the central bank’s hands are tied, as interest rate hikes in major economies and outflow of funds are exerting pressure on the ringgit.
The FMC said the ringgit, along with other regional currencies, had been weighed down by several global developments, including signs that China’s post-Covid economic recovery are losing its momentum.
“Against the backdrop of the US dollar strength, the FMC observed that the extent of the recent depreciation of the ringgit is not reflective of the country’s economic fundamentals,” it said in a statement.
MIDF Research, in a recent note, said the recent weakness in most currencies against the US dollars would be reversed when the US Federal Reserve (Fed) decides to end its policy tightening.
“Fundamentally, the ringgit is in a good position to strengthen as the domestic economy stays on an upbeat momentum and as a net commodity exporter of crude petroleum, liquified natural gas and palm oil, the ringgit stands to gain from the elevated global commodity prices and sustained trade surplus.
“However, we believe the strengthening of the ringgit will return and regain once the Fed hits the pause button and the earliest is the fourth quarter of 2023,” it said.
