Fixing the ringgit

Currency and exchange rates are complex and complicated 

THE ringgit’s exchange rate movement has put Prime Minister Datuk Seri Anwar Ibrahim and his unity government team on the backfoot. You know they are scrambling when they push forward the central bank to do their bidding. 

In a span of a week, Bank Negara Malaysia (BNM) had released two statements to the media on the currency issue. The prompt was the ringgit sliding close to the 4.80 against the US dollar, its lowest position in January 1998 in the aftermath of the Asian Financial Crisis that began a year earlier. 

What followed was an increase in the chatter on the Malaysian currency and its perceived weak position. 

Politicians from the Opposition side of the aisle took advantage of the moment, lobbing salvos to the Madani government. You cannot blame them. This is akin to giving your opponent a “bola tanggung” in a badminton game. Your opponent is bound to return with a smash! 

So, naturally, some politicians from the opposing side went to town criticising Anwar’s administration for supposedly allowing the ringgit to come to this stage. When Anwar was perched on the other side of the aisle, it was the same story. He, too, had criticised the then administrations on the currency issue. So, it’s payback time. 

So, we let the politicians do what they do. But politics aside, the underlying issues are varied and complicated, local and global. 

We cannot look at this issue on the surface. Currency and exchange rates are complex and complicated. 

Many factors govern the way ringgit behaves. Politics stability has a part. But it goes way beyond that. You have perception, fiscal management, state of the current account position, borrowing by individuals, inflation rate, interest rates of neighbouring countries, the interest rates of the major nations around the world, especially the US. 

So, it’s a combination of factors. At any point of time, one factor can outweigh another.

Ringgit is also impacted by issues like outflow of currency. When foreign workers repatriate money back to their homes, it has an impact on the nation’s currency. 

There is the issue of demand and supply for the currency. You want to look at capital flight, portfolio outflows and conversion of export proceeds. They all add up. 

So, if you have politicians trying to pack the whole issue into a soundbite, be mindful. He or she is most probably trying to take us for a ride for his political purposes. 

Now, back to where we started — on the government seemingly trying to get the central bank to do the heavy lifting on answering the ringgit issue. Of course, BNM has a key role when it comes to currency. 

It is part of its ambit. BNM can influence the movement, to some extent, with the ability to influence the domestic interest rates. 

However, as outlined above, the ringgit is being influenced by a myriad of reasons. So, the government of the day also must step forward and take charge of the narrative, while being cognizant that there are also various influences that are beyond their control. 

BNM governor Datuk Abdul Rasheed Ghaffour and his team has been doing their bit to put the issue into perspective. When talking at the Financial Market Association of Malaysia event in November 2022, for example, he said that the “movements of the ringgit exchange rate in recent times have not been a fair reflection of Malaysia’s economic fundamentals.” He has repeated that message a number of times, on a number of occasions. 

While under pressure to explain away the issue, the central bank has found an ally abroad. 

In a series of entries at his X account, formerly known as Twitter, the World Bank chief economist Apurva Sanghi has provided some counsel. 

“Sure, high US interest rates matter. But domestic policies matter too which are for GOVT to fix (not BNM),” he said in an entry on Feb 23. 

Elaborating his entry, he pointed out that external factors, especially the high US interest rates and rising geopolitical uncertainty, strengthen the US dollar and weaken the ringgit. Then, there are domestic structural factors weighing on ringgit like exports/GDP (which have shrunk from 120% of GDP in 2000 to less than 70% today) and the slowing of growth of foreign direct investment (FDI) inward stock into Malaysia. 

“Bottom line: Improving governance, boosting trade, increasing FDI etc is govt’s remit to address — not a central bank’s,” he added. 

As outlined in an article in this week’s issue of The Malaysian Reserve, there is also the question of Malaysia’s competitiveness, or the lack of it, over the years. This has also impacted the currency. (Click here).

So, Anwar and his team of economic experts have much work ahead of them. 

  • Habhajan Singh is the corporate editor of The Malaysian Reserve. 

  • This article first appeared in The Malaysian Reserve weekly print edition