ONE of the biggest questions Malaysians with savings in ringgit have been asking is, what is going to happen to the currency in the medium to longer term.
Such concern stems from the fact that the ringgit has been underperforming over the last 10 years, losing its value significantly not only against the US dollar but also many other currencies, including its regional peers.
For instance, the ringgit has lost about 31% against the Taiwanese dollar; 26% to the South Korean won; 23% to the Chinese yuan; 22% to the Singapore dollar; and 21% against the Thai baht over the period.
In recent memory, many Malaysians were caught by surprise by the speed at which the ringgit depreciating against the US dollar – from around RM3.15 per US dollar at end-August 2014 to more than RM4 per US dollar within one year.
This happened in tandem with the crash in the prices of oil, which is a key economic driver and major source of revenue for Malaysia.
The ringgit is currently hovering at RM4.22 per US dollar.
Year-to-date, it has declined 4.3% against the US dollar.
Growth dampener: A truck travels over a bridge near stacked containers at Northport in Port Klang. While a weak ringgit could boost exports, it is a flawed strategy to invigorate growth. — Bloomberg
Economists attribute the consistent underperformance of the ringgit against its peers and trading partners to a confluence of domestic and external factors.
As Socio-Economic Research Centre executive director Lee Heng Guie puts it, the fundamental pull and push factors influencing the demand of the ringgit relative to the demand of foreign currencies are macro conditions, external conditions and non-economic factors such as domestic political issues and geopolitics shocks.
Broadly speaking, he notes, Malaysia’s average growth annually has been a mediocre 4% over the last 10 years compared with 9.2% in 1991-1997; budget has consistently been in deficit; government debt and liabilities have been growing; and current account surplus has been narrowing.
In addition, there are lingering political uncertainties, which have raised concern about policy transitions and the country’s future direction, Lee points out.
Lee Heng Guie SERC
Externally, he notes, the bouts of financial volatility due to United States Federal Reserve monetary policy as well as heightened risk aversion to emerging market economies, including Malaysia, have also weighed down the ringgit.
Upside versus downside
Lee expects the ringgit-to-US-dollar rate to range at RM4.20-RM4.25 by end-2021, and RM4.10-RM4.15 by end-2022.
“The prolonged pandemic and ‘open-shut’ strict containment measures have inflicted deep economic scarring. This, and the lingering political uncertainties, would weigh on the ringgit over the coming months,” he explains.
“Despite the healthy trade surplus from buoyant exports, and higher crude oil and palm oil prices supporting the demand of ringgit, capital outflows from the equity market, offset by net foreign purchase of domestic bonds as well as cautious long-term capital inflows, could weaken the support for ringgit.”
In general, Lee says, the main downside risks for the ringgit in the second half of this year and 2022 are in the delayed recovery in economic and business activities; worsening Covid-19 conditions and slowing down of vaccination pace; further monetary easing by Bank Negara to prevent the economy from slipping further; expected moderation in exports as favourable low-base effects wear off; and continued political turmoil and impasse in September’s parliament session.
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On the flip side, better macro clarity as the National Recovery Plan is fast tracked, supported by the reaching of herd immunity; successful containment of the pandemic; a responsible Budget 2022 to ease concern about fiscal and debt sustainability; and the gradual removal of domestic monetary accommodation, probably in the second half of 2022, are some of the factors that could lift the ringgit.
Essentially, Lee argues, the government needs to implement fundamental changes through economic, social and institutional reforms to build a stronger Malaysia.
These cover the aspects of raising Malaysia’s economic growth potential via productivity enhancement and technology advancement; spurring high-quality and value-creation investment through the adoption of digital technology transformation; rebuilding its fiscal resilience via revenue and expenditure rationalisation; reforming institutions through best governance practice, upholding of integrity and the separation of powers as well as independence of the parliament, executive and judiciary.
“Malaysia needs to enhance its competitive strength on all fronts to rival its fast-catching competitors in the region,” Lee says.
“Ultimately, our economic, financial and investment policies must be credible and conducive to both domestic and foreign investors as capital inflows and outflows are the principal driver of the ringgit exchange rate,” he adds.
High-risk premium
According to Sunway University economics professor Yeah Kim Leng, persistent ringgit weakness over the last decade cannot be explained by economic fundamentals alone.
“A plausible explanation is that the currency markets have ascribed a high ‘risk premium’ to the ringgit based on negative news flows such as the 1Malaysia Development Bhd (1MDB) scandal, erosion of investor confidence and political uncertainties,” he says.
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“The political risk premium and confidence factors can be addressed through enhancing political stability and instilling trust, integrity and competency in the country’s administration and implementing sound economic policies and market-based strategies to advance the country’s growth, productivity and competitiveness,” he adds.
Yeah points out that while a weak currency could boost exports, it is a flawed strategy to invigorate growth.
“An undervalued currency, while favourable to exporters, will retard the country’s structural upgrading and shift to higher value, technology and knowledge-intensive activities.
“The short-term boost to exports arising from a cheap ringgit, therefore, masks the country’s structural problems such as over-reliance on unskilled foreign workers and preponderance of low value labour-intensive activities.
“As a consequence, growth will continue to decelerate as the country has been experiencing over the last decade,” Yeah explains.
He reckons the ringgit will rebound if the country could surmount the triple crises – pandemic, recession and political instability – it is facing currently. Holding an optimistic view, Alliance Bank chief economist Manokaran Mottain expects the ringgit to strengthen next year, as the Covid-19 situation improves on higher vaccination rate, and the ongoing political turmoil gets resolved by end-2021, thus lifting investor sentiment.
Manokaran Mottain Alliance
The recovery in global oil prices is also expected to boost the ringgit strength, he says.
Manokaran expects the ringgit to trade range-bound between RM4.20 and RM4.30 against the US dollar for the remaining months of 2021, before strengthening to RM4.15 against the greenback next year.
Currently, the expanded money supply amid the low interest-rate environment is a major factor of ringgit depreciation, he says.
“There is ample room for upward revision in overnight policy rate in mid-2022, assuming a strong recovery in Malaysia’s economic activity. As such, money supply is expected to decline and this will likely increase the value of our currency,” Manokaran points out.
He says there are other initiatives that the government could undertake to enhance the value of the ringgit such as ensuring a stable inflation environment and attracting more foreign direct investments.
Government role
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expects the ringgit to remain an underperformer against major currencies, particularly the US dollar.
Bank Islam Mohd Afzanizam
He notes the greenback is expected to remain firm on expectations that the US Federal Reserve will begin tapering its asset purchases next year and eventually raise interest rates amid the ongoing economic recovery and rising inflationary pressure in the United States.
In the immediate term, Afzanizam says, the ringgit should linger around RM4.20 to RM4.30 to the US dollar.
For the medium term, the exchange rate forecast for the ringgit is in the midst of recalibration, given renewed political uncertainties.
“Domestically, the focus is on the political stalemate and how it will impact economic policies,” Afzanizam says, pointing to the 12th Malaysia Plan, which will be tabled on Sept 20, and Budget 2022, which will be unveiled on Oct 29.
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In addition, he says, there is reason to remain cautious as the Covid-19 crisis is not yet over. On a positive note, he reckons, the progress of the country’s vaccination programme raises hope for the reopening of the economy soon.
Despite the medium-term uncertainties, Afzanizam remains hopeful of the long-term prospects of Malaysia, and hence, the ringgit.
“This country is blessed with natural resources. It is a fertile land and is also peaceful. The population is relatively young and they are highly educated and IT savvy. Therefore, Malaysia has what it takes to grow and gain the developed status at some point in the future,” he argues.
In this regard, he stresses, the government’s role is extremely important, especially in areas relating to capacity building such as education and infrastructure as well as making a conducive environment for businesses to prosper.
“In short, it is about economic and institutional reforms that would strengthen our economic base, which could then translate into a sustainable appreciation of the ringgit,” he explains.
At its current value, the ringgit is ranked the cheapest currency within a basket of Asian ex-Japan currencies, according to DBS Group Research.
The Singapore-based banking group notes in its report that the ringgit’s under-valuation looks very sharp at -13.7% based on the DBS equilibrium exchange rate (DEER).
The DEER methodology is built on three basic economic ideas – relative purchasing power parity, productivity differentials and terms of trade.
Despite the ringgit’s sharp undervaluation, upside appears limited for the local currency.
DBS notes that persistent risks from Covid-19 infections and political uncertainty could continue to weigh on sentiment towards the ringgit for the time being.
Meanwhile, the rupiah and yuan are also undervalued based on the DEER, while the Philippine peso, baht and Indian rupee are among the most expensive currencies in the region.
The baht’s over-valuation remains quite sizeable, even though it has depreciated significantly, and is Asia’s worst-performing currency on a year-to-date basis, DBS says.