KUALA LUMPUR: The ringgit is far more sensitive to the movement of commodity prices than its Asian peers, said Employees Provident Fund chief strategy officer Nurhisham Hussein.
In an interview with Bernama recently, he shared his views regarding the weakness of the ringgit and equities market.
Right off the bat, Nurhisham opined that countries which rely on commodity exports for their economy can see their national currency's exchange rates fluctuate with commodity prices.
Commodity exports make up 70 pct of Malaysia’s trade surplus
He explained that Malaysia's trade in commodity exports, in particular, contributes largely to the percentage of gross domestic product (GDP).
Another consideration is that Malaysia's commodity exports primarily consist of industrial inputs rather than agricultural produce, unlike Thailand, he said.
"Exports of liquefied natural gas (LNG), crude palm oil (CPO), and crude oil are equivalent to 70 per cent of Malaysia's trade surplus.
"Price movements have a direct impact on both the reality and the perception of Malaysia's trade fundamentals and the sentiment on the ringgit as well," Nurhisham said.
As a result, he believes that the recent ringgit weakness vis-a-vis regional and major currencies are part illusion and part reality, as the ringgit performed relatively well in the second half of 2022 (2H2022), buoyed by sky-high LNG prices driven by the Ukraine-Russia war and panic buying in Europe.
''With prices returning to more sane levels, with Asian spot LNG prices down 80 per cent from last year's peak, the ringgit has returned to the prevailing trend affecting most regional currencies versus the US dollar,'' he said.
To recap, the ringgit eased by 5.8 per cent in the first half of 2023 (leading losses among emerging Asian currencies), while equities in Malaysia were the biggest losers (together with Thailand) in a mixed market.
Prebisch-Singer hypothesis
Over the long term, Nurhisham underscored that the continued influence of commodity exports in Malaysia's trade mix would create further downward pressure on the ringgit against the currencies of non-commodity producers.
"This phenomenon, known as the Prebisch-Singer hypothesis, postulates that the terms of trade between basic commodities versus manufactured goods will decline over time, as efficiencies and productivity improvements reduce the share of commodities used in final goods.
"This manifests itself in progressively weaker exchange rates for commodity producers like Malaysia, Australia and Latin America against the major currencies," he said.
Nurhisham opined that any long-term practical solution to improving the ringgit's value must, therefore, look beyond short-term financial measures, such as raising the overnight policy rate (OPR), to improving domestic value added by taking commodity production further downstream or phasing out commodity production entirely.
Can exports boost the ringgit quagmire?
Malaysia's exports are now cheaper relative to history and to its peers, however, the unfortunate reality is that much of the country's manufactured exports are part of the global value chain, and domestic value added is low, said Nurhisham.
"In other words, for most exports, there is also a large imported component. Much of Malaysia's manufacturing is dominated by multinational corporations (MNCs), which do only part of their processing onshore.
''As a result, while a weaker ringgit will make exports 'cheaper' on the global market and thus presumably attract more demand, it also makes the required imported inputs more expensive,'' he said, adding that the degree to which price competitiveness improves is greatly muted.
To give an example, Nurhisham said that for export goods with only 20 per cent domestic value added (80 per cent import content), a 10 per cent depreciation of the ringgit will only improve price competitiveness by 2.0 per cent.
''MNCs also largely shift semi-processed products into and out of a country via transfer pricing, not arms-length market pricing. This renders the effect of exchange rate movements on such 'internal markets' largely a moot point.
''Even ostensibly high domestic-value added exports like CPO include a substantial imported component, as commercial grade fertiliser is mostly imported,'' he said.
Hence, the main impact of the weaker ringgit is not on competitiveness, it is on jobs, noted Nurhisham.
''Given that some part of the ringgit's weakness comes from weaker commodity prices, the local note limits the pass-through of these lower prices into the domestic economy.
"This allows commodity producers to sustain revenues and profits, and keep people employed, particularly crucial in the plantation sector since there are a large number of rural smallholders involved,'' he said.
On Bank Negara Malaysia's (BNM) mandate to ensure price stability and financial sector stability, Nurhisham said the central bank has managed to hold down the fort well, as other emerging markets such as Bangladesh and Sri Lanka have suffered from US dollar shortages that have had a direct impact on growth.
Malaysia's fundamentals positive
The nation's fundamentals are generally positive as Malaysia continues to generate a positive trade surplus and current account in the balance of payments, he said.
The country owns substantial external assets comprising BNM's international reserves, as well as financial and real asset holdings by Malaysian residents.
''Markets are also forward-looking, taking into account expectations of future events as much as current data.
''Given the Federal Reserve or Fed is likely to continue hiking while the outlook for the emerging market interest rates is more stable, emerging market currencies will remain under pressure until the Fed signals it will stop,'' he said.
Nurhisham concluded that BNM’s latest announcement that it would intervene in the foreign exchange market to stem currency movements that are deemed excessive is a signal to the market that it has overshot the mark, and should bring some breathing room for the ringgit. - Bernama
