Jomo said a multitude factors – including the role of certain “powerful” speculators and Malaysians who hoard their cash abroad – exerted pressure on the ringgit.
PETALING JAYA: A weak ringgit is “not the most important problem” for Malaysia currently, according to a prominent economist.
Professor Jomo Kwame Sundaram, a research adviser at Khazanah Research Institute, also said that the ringgit’s depreciation was not caused by the country’s economic fundamentals.
Speaking exclusively with StarBiz, he said multitude factors – including the role of certain “powerful” speculators and Malaysians who hoard their cash abroad – exerted pressure on the ringgit.
Like many other currencies, the ringgit has weakened against the US dollar, particularly 7.6% since February this year.
In the same period, key currencies such as the Singapore dollar, Japanese yen and Chinese yuan have depreciated by 0.85%, 6.4% and 6%, respectively, against the US dollar.
The Australian dollar has also lost about 3% in value against the greenback.
The euro and the British pound, however, are some of the exceptions. The euro has strengthened against the US dollar since February by 2.7%, while the pound has appreciated by 5.7%.
The strengthening of the US dollar is the result of aggressive interest rate hikes by the Federal Reserve (Fed), the central bank of the United States, to curb inflation.
The ringgit, for example, has come under immense pressure as the spread between Malaysia’s overnight policy rate (OPR) and the Fed’s federal funds rate (FFR) widened rapidly over the past year.
A big OPR-FFR differential, whereby the FFR is higher, causes the outflow of funds from Malaysia in search of higher returns elsewhere. In economics, these funds are often called “hot money”.
Currently, the OPR stands at 3%, while the FFR is at 5% to 5.25%.
In addition to interest rate changes, the increasing concerns on the global economic outlook have also added strength to the US dollar, typically seen as a safe haven for investors.
Nevertheless, it is noteworthy that the US dollar has been losing steam since the start of July.
The US Dollar Index, often used to indicate the strength of the greenback, hit a 14-month low yesterday.
The ringgit, which has shown some convincing signs of stabilisation in recent weeks, closed at RM4.5910 against the US dollar yesterday, marking a 1.8% appreciation since the year-to-date low of RM4.6765 on June 23.
Jomo explained that the weak ringgit, which used to be around RM4.26 per US dollar on Feb 1, was not “costless” to Malaysians.
“We are paying a cost by having a weak ringgit. That is undeniable.
“But the weak ringgit is not due to our fundamentals. It is due to speculation,” he said.
Jomo, who was previously a part of the five-member Council of Eminent Persons, highlighted that the ringgit has been pressured for years by those stashing their cash on foreign soil.
He pointed out that Malaysia is ranked first in the Panama Papers controversy outside of the Americas.
The Panama Papers refer to a giant leak of more than 11.5 million financial and legal records in 2015 that revealed how companies and individuals from more than 200 countries had hidden their money in offshore accounts, tax havens and shell companies.
Elaborating further on speculation, Jomo said that some “very powerful” people have bet on Bank Negara to raise interest rates and that they tried to pressure the central bank to hike the OPR.
“When the rates do not go up, they lose money.
“I think that the fact that Bank Negara has avoided three opportunities to raise interest rates (in January, March and July) is an indication that Bank Negara is now bolder and is not just simply following the anticipated market trends.
“It is also not willing to allow certain speculators to have their way,” according to Jomo.
When asked whether Bank Negara should raise the OPR further to strengthen the ringgit, Jomo said the central bank has to choose between two difficult options.
“You can have a weak ringgit by not hiking the OPR or you can have the cost of debt becoming more onerous by raising the rate, which is worse.
“I don’t mind penalising those people speculating on the ringgit and interest rates to make sure they lose once in a while,” he added.
Jomo noted that Malaysians were heavily indebted and the decision to raise the OPR will only exert additional burden on their pockets and savings.
As at end-2022, the country’s household debt-to-gross domestic product (GDP) ratio stood at 81.2%, of which about 60% were housing loans.
For comparison, the household debt-to-GDP ratio was much lower in 2000 at just 47%.
Contrary to what is commonly believed, Jomo argued that a weak ringgit did not significantly help to raise exports, especially if there was no increase in demand from the importing countries.
“The prices in the catalogues are more or less fixed. The consumers (in importing countries) are not going to buy more of our products just because the US dollar is stronger.
“The only person who is going to benefit is the importer, from the improvement in margins. We can’t assume demand responsiveness to price changes (as a result of a stronger US dollar),” he explained.
The economist believes that any increase in benefits arising from a weak ringgit would only be marginal.
Moving forward, Jomo said the government must act on illicit financial flows out of the country. The government should also require Malaysians to bring the money generated abroad, for example through exports or asset sales, into the country, he said.
Jomo questioned the need to over-liberalise the economy to the extent that such outflows could no longer be contained effectively.
At the same time, Jomo cautioned that any drastic measure should be avoided to prevent unnecessary panic in the system.
“In September 1998, the capital controls introduced under the Tun Dr Mahathir Mohamad administration didn’t really help the ringgit because the money had already left the country during the crisis.
“There was nothing left to go out. The crisis started in July 1997 and the capital controls were introduced 14 months later,” he said.
Jomo urged the government and Bank Negara to undertake a holistic assessment of what is in the best interest of people and the economy.
“We must look at how different interest groups are affected.
“A lot of discussions right now (on the ringgit and economy) are oversimplified and uninformed by the dynamics in the market.
“There are a lot of questions and we should encourage them (the government and Bank Negara) to address these questions by providing empirical data,” he said.
