Malaysia needs a stronger ringgit that will translate into improved well-being of the rakyat at lower cost. A stronger ringgit will amplify any feel-good factors in the economy with cheaper imports and greater affordability. — GLENN GUAN/The Star
HOW times have changed. Recent months have seen the ringgit steadily rise to around RM4.50 against the US dollar.
It is a far cry from February when the headlines blasted the ringgit’s perilous position. Many newspapers then screamed about the diminished value of the ringgit which had slumped to an all-time low against the US and Singapore dollars.
THE ringgit’s turnaround has been impressive so far this year, going from the second worst performing currency against the US dollar to the best in Asia.
Since the ringgit is no longer weak enough to allow exporters to keep their profits abroad, the currency’s appreciation will prompt exporters to convert their overseas proceeds in larger quantities.
What prompted the rise of the ringgit against the US dollar and consequently other currencies? There are many reasons.
A currency is often tied to sentiment, demand and also fundamentals. There are other reasons too but a trigger points was when government-linked companies (GLCs) and government-linked Investment Companies (GLICs) were asked to bring back their profit back home.
This was a good start which resulted in greater ringgit stability against the US dollar but insufficient to send the currency racing upwards.
Political instability was seen as a thorn in attempts to overcome the ringgit’s weakness. For a long time, the rock-solid political sturdiness of the government had kept the ringgit on firm ground.
The Sheraton move, the subsequent changes of government and the constant threat of change in government were destabilising factors which did not help the ringgit’s cause. 1Malaysia Development Bhd’s corruption scandal also took a toll on the local note, falling for a decade since the saga started.
A slew of positive economic data has also helped in the ringgit’s rebound.
Mida reported that for the first quarter of 2024, Malaysia attracted RM83.7bil of approved investments, which was a 13% increase from the same quarter last year.
The tens of billions in data centre investments are also helping.
Stronger exports, especially in Malaysia’s crucial electrical and electronics sector, are bolstering proceeds that in turn will lift our own receipts and the ringgit.
Moreover, advanced estimates of Malaysia’s GDP for the second quarter indicate that the economy expanded by 5.8%. The price stability Malaysia has, with inflation at 2%, is also helping the ringgit.
Besides economic factors, the dicey US dollar and its outlook are to the ringgit’s advantage. The dollar index, a measure of the American currency against a basket of other currencies, has fallen off its peak together with US treasury yields.
With the sell-off in US stock markets, the US 10-year treasury yield is now below 4%. Malaysia’s own 10-year MGS has a yield of 3.73%, putting the yield close to the US equivalency.
However, the US economic data that sent the markets down, along with the impending interest rate cut, will not help the US dollar.
As economic data points towards recessionary conditions, and the interest rate is shaving off support and demand for the dollar, the ringgit will continue to find favour.
The local stock market slump will be detrimental to the ringgit, where currency gains and a stronger stock market had created double returns for foreign investors.
It will be worth watching if Malaysia can maintain its currency strength given the sensitivity of the local currency to the health of the global economy through trade and investment flows.
A key determinant of the ringgit’s stickiness will be the continuation of Malaysia’s positive policy moves and the upcoming budget, where improvements in its fiscal deficit will act as buffers against a weaker US economy.
Malaysia needs a stronger ringgit that will translate into improved well-being of the rakyat at lower cost.
A stronger ringgit will amplify any feel-good factors in the economy with cheaper imports and greater affordability.
If the ringgit continues to rise, reaching RM4.20 in the months ahead would be validation of the country’s economic management.
A rise in foreign-exchange reserves must also follow. There is no point having a strong currency if it does not increase the country’s buffers.
This article first appeared in Star Biz7 weekly edition.
