Under control: A money changer in Ampang, Selangor. The government must act quickly to restore the people’s and investor confidence that it is able to manage the impact of the ringgit’s depreciation on the economy, businesses and households.
SINCE the ringgit was de-pegged in 2005, it had depreciated by only 1% per annum to end the year 2023 with an average exchange rate of RM4.5605 against the US dollar compared to RM3.7871 in 2005.
Throughout the 18 years (2005-2023), the ringgit had strengthened in seven years: 2006 (3.2%; RM3.6682 per US dollar), 2007 (6.7%; RM3.4375), 2008 (3.1%; RM3.3333), 2010 (9.4%; RM3.2211), 2011 (5.3%; RM3.0600), 2018 (6.6%; RM4.0351); and in 2021 (1.5%; RM4.1433).
During the nine years of depreciation, the ringgit fell the most in 2015, which saw it depreciate by 16.2% against the US dollar to average RM3.9055 from RM3.2729 in 2014.
This was influenced by a mix of external factors (economic shocks, the crude oil price crashed, the Federal Reserve’s (Fed) tantrum and normalisation of interest rates) and domestic concerns/issues (domestic economic growth prospects, inflation, 1MDB scandal, political uncertainty, and concerns about the fiscal deficit and debt).
Speculative forces and weak sentiments also played a part.
There were two distinctive periods displaying the ringgit’s performance since it was de-pegged in July 2005.
The ringgit had appreciated by 15.7% in 2005-2014, but reversed to depreciate against the US dollar since 2015, with the ringgit registering an average exchange rate between RM4.0351 and RM4.5606 against the US dollar in 2016-2023.
Despite Malaysia’s interest rate (as benchmarked by the overnight policy rate or OPR) was set at between 1.75% and 3.25%, higher than the Fed Funds rate (0.25%-2.50%) during the period 2015-February 2022, the ringgit mostly printed at least RM4 against the dollar, except for brief months averaging below RM4.00 before and during the 14th General Election (January-May 2018, April 2016, and January-July 2015).
A number of international and domestic developments probably explained a general weakening of the ringgit against the dollar.
> Global crude oil prices collapsed in 2014-2016, which had impacted the government’s oil-related revenue and oil exports, as well as dampened investors’ sentiment on the ringgit.
> The alleged embezzlement of 1MDB money between 2009 and 2012 went unchallenged until a full implosion in 2015. The revelations became a major political scandal in Malaysia, triggering investors’ concern and confidence, domestic protests and voters’ backlash.
> Domestic political uncertainties that have characterised Malaysian politics since the 14th General Election held on May 9, 2018, including four prime ministers, leading to unclear policy directions, loss of competitiveness and lower investor confidence.
> Malaysia’s economic fundamentals have somewhat weakened for some indicators amid a strong capitalised banking system and a deep capital market. Economic growth had slowed to an average of 3.8% per annum in 2015-2023 from 4.9% per annum in 2006-2014.
Except for some years of high headline inflation (2014, 2017, 2022 and the first half of 2023), inflation increased by 2.4% per annum in 2005-2019 and 2.8% er annum in 2021-2023 before sinking into price deflation (-1.2% in 2020), the Covid-19 pandemic year.
Fiscal deficits persisted; federal government debt increased by 10.4% per annum in 2005-2023 (end-2023: RM1.2 trillion or 64.3% of gross domestic product or GDP versus end-2005: RM198.7bil or 36.5% of GDP); federal government debt and liabilities stood at RM1.5 trillion or 82.3% of GDP at end-2023; national external debt too expanded by 10.8% per annum during 2005-2023 (end-2023: RM1.24 trillion or 68.2% of GDP; end-2005: RM197.7bil or 36.4% of GDP).
The current account surpluses had shrunk from a strong double-digit share of GDP in 2005-2011 to low-single-digit of GDP starting 2012, hitting 1.2% of GDP in 2023.
> There have been several major economic shocks on a global scale (2008-2009 Global Financial Crisis or GFC), 2020 Covid-19 pandemic crisis, 2022 military conflict in Ukraine, and the Israel-Hamas war in 2023), with repercussion effects on domestic economy via trade and financial channels.
Domestic interest rates were reduced during the economic shocks to stem severe economic downturn. During economic crises, investors generally shy away from investing into emerging economies’ asset class, including the ringgit, on the flight to quality and safe-haven assets.
> The Fed’s monetary policy stance will influence the US dollar and capital flows. The Fed had slashed interest rates and implemented quantitative easing during the 2008-2009 GFC, and the US dollar was bashed down.
It recovered when the Fed gradually returned to normalcy in 2015-2018. Since March 2022, the Fed has forcefully raised the Fed funds rate 11 times to 5.25% to 5.5% to fight the inflation, lifting the US dollar stronger.
First Consideration: Strengthening the foundations for growth
We reckon positive economic growth for this year, the challenge is to sustain quality and higher future growth prospects.
The foundations for future growth need to be strengthened by the urgency of policy and structural reforms to boost productivity, increase investment and business opportunities, improve education outcomes, enhance skill set, accelerate the climate transition, and make growth more inclusive, ensuring access to economic opportunities for all.
The government faces mounting fiscal challenges from persistent budget deficits and rising debt burdens as well as sizeable additional future spending pressures. A weak fiscal consolidation questions fiscal sustainability.
One welcome move is the enactment of the Public Finance and Fiscal Responsibility Act, which set the fiscal sustainability parameters (expenditure, fiscal deficit, debt and financial guarantee).
While some price and subsidy reform measures have started to be implemented in phases, stronger efforts are needed to contain spending growth and design a sustainable revenue stream, instead of ad-hoc revenue measures.
Second Consideration: Restoring economic agents’ confidence on macroeconomic variables
It has been long established that lack of confidence was one of the main reasons behind the financial and economic crises. Confidence is a self-fulfilling prophecy.
Therefore, the government and policymakers must act quickly to restore the people’s confidence and improve investor sentiment that it is able to manage the impact of the ringgit’s depreciation on the economy, businesses and households.
Constructive engagement through opening and maintaining channels of communication between the government and private sector can make an important contribution to enhance the confidence of economic agents.
As consumer confidence increases, their demand for foreign currency will decrease and the value of domestic currency will increase.
Third Consideration: Sustainable investment climate
The government has launched the Economy Madani Framework to make Malaysia a regional economic powerhouse; New Industrial Master Plan 2030 to drive manufacturing transformation; and the National Energy Transition Roadmap to facilitate and drive sustainable practices and green initiative.
Three successive years of substantial approved investments totalling RM906.7bil in 2021-2023 (RM228.1bil in 2019-2020), of which RM513bil or 56.6% of total was foreign investment. This suggests that Malaysia remains attractive to foreign investors.
The realisation of investments in the years ahead will boost the national output and income as well as generate jobs. For the period 2016-June 2023, the realisation of approved investments in the manufacturing sector was about 85%.
Strong execution of the plan and initiatives are critical to convince both domestic and foreign investors that Malaysia is firmly committed towards creating a conducive investment climate to attract high quality, durable investment and support sustainable and inclusive economic growth.
Transparent, consistency and predictable policy and market conditions not only help attract foreign investors but also help spur domestic investment. Remove barriers that may hinder equal opportunities for all.
There is the urgency of structural reforms to boost productivity, investment and labour market participation, and make growth more inclusive through improving technology and digitalisation outcomes, enhancing skills and talent development, and reducing constraints in the labour and product markets to foster healthy competition.
The bottom line is the ringgit exchange rate is one of the most important determinants of a country’s relative level of economic health and relative competitiveness in the terms of trade as well as the capital movements in terms of real rate of return on investment.
While exchange rates are determined by numerous complex external and domestic factors, the government has to offer compelling economic and investment propositions as well as strong corporate earnings prospects to lure more foreign and domestic investors into domestic asset classes.
As at end-January 2024, Malaysians (individuals and corporates) have placed RM247.4bil worth of foreign currencies deposit, equivalent to 10.4% of total banking system deposit, representing a big jump from RM53.5bil or 4.7% of total deposit at end-2010.
In addition to strengthening the shrinking current account surpluses and reducing services outflows, we have to strengthen the financial account (which measures foreign money flowing into the country and domestic residents’ money investing abroad).
There was higher repatriation of interest, profits and dividends earned by foreign direct investments to their parent companies and also on portfolio investment.
We also observed that Malaysia’s outward investment abroad have increased substantially to RM39.4bil per year in 2011-2023 from RM19.5bil per year in 1999-2010 while domestic residents’ portfolio outflows investing in equities, investible funds and bonds were larger at RM28.9bil per year in 2010-2023.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed are the writer’s own.
