PETALING JAYA: The weakening of the ringgit has reached an unprecedented low if seen from its real effective exchange rate (REER), Malaysian Rating Corp Bhd (MARC) says, citing data from the Bank of International Settlements (BIS).
Defining REER as a measure of the exchange rate value weighted by trade and adjusted for inflation, MARC explained that on one hand, a fragile ringgit could mean that exports from Malaysia are now cheaper relative to history and to its peers, on the flipside it also implies that imports are increasingly more expensive, affecting businesses and consumers.
“As such, while a weaker ringgit is said to be an automatic stabiliser since it theoretically raises the value of exports, it exacerbates imported inflation at a time when inflation is a global and local concern, especially since inflation is significantly driven by cost-push pressures and is affecting Malaysia’s rising cost of living,” the rating agency said in a statement.
Despite acknowledging that a weaker exchange rate is a temporary adjustment to prices for a country to maintain its competitiveness, it noted that competitiveness itself has several facets such as policy stability as well as infrastructure and tax rates, and these factors need to be distinguished from merely having cheap exports.
MARC argued that the reliance of a country on a weaker exchange rate in the long term contradicts not just the fundamental concept of raising a country up the value chain but also relegates a country to de-development.
It noted that benefits reaped from exchange rate depreciation is not holistic for any country, as this provides only a limited uplift to its current account balance.
It pointed out that Malaysia’s current account balance-to-gross domestic product ratio has deteriorated over time from 15.9% at the end of 1999 to 1% as at the first quarter of this year.
“Malaysia’s trade partners and capital market investors have evolved to a higher level of sophistication and will approach their dealings with the mantra of value optimisation, not just cost savings,” it added.
The rating agency opined that perceptions of Malaysia’s economic standing and the performance of the local currency are related to the degree of international confidence in the country.
“Besides the issue of weaker external balances, debt sustainability and public financial strength is weakening. At its apex in the 1990s, Malaysia had a fiscal surplus but it is now forecast to record a fiscal deficit of around 5% in 2023.
“This deficit has an adverse impact on Malaysia’s debt servicing payments-to-revenue ratio, which has trended higher since the 9.4% of 2012 and breached the self-imposed threshold of 15% during the height of the lockdowns in 2020 and 2021,” it said.
MARC said these data reflected structural issues in which revenue was only sufficient to cover operating expenditure, encroaching on the use of debt to fund development expenditure.
As such, the agency hopes the postponement of the Fiscal Responsibility Act’s proposed tabling to the end of the year is a result of a well-planned approach instead of a consequence of coordination challenges.
“Maintaining adherence to various debt measures such as debt limits and debt service ratios on a long term and consistent basis will be a preferred modality by international investors.
“Building up economic buffers beyond basic adequacy is imperative, since global uncertainties can crystallise multiple risks into a perfect storm,” said MARC.
