Why Malaysian Ringgit Weakening (5 Shocking Reasons)

Why Ringgit always so weak versus USD and SGD?
Even weaker now versus Euro and pounds sterling than previously?

Every Malaysians worst nightmare when Ringgit weakening.
Purchasing power got crushed like Oceangate Titan.
You pay higher more for imported goods like your Australian Steak.
You sell kidneys to pay for services like your Blackpink or Coldplay concert tickets.

Even local goods you eat get prohibitively expensive if not for government subsidies because feedstock such as corn & soybean, are actually imported to fatten locally reared chicken you eat.

Malaysians already High cost of living is usually made worse by weak currency.

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Interest Rate Plays a Big Factor in Ringgit Weakening

Do you know, Malaysia interest rate – OPR is also a major factor in weak Ringgit?

Interest rate differential between 2 countries (US & Malaysia) drives cross border money flows.
A country with higher Interest rate naturally attracts more foreign money, all other things equal.
Example, when US Cash Deposit gives 5% per annum versus Malaysia Fixed Deposit giving 3% per annum, global investors flock to put their money into US Fixed Deposits.
Hence rising the demand for US Dollars, making it strong relative to Ringgit.

This is what happened across the globe as countries like UK still increasing interest rate.

Some countries took a pause (US, although they had been the MOST aggressive in 2022)

And some countries still cutting interest rate (China) as its export business slowed down while local Chinese people aren’t buying stuff as much as they did before Covid – in other words slowdown in the economy.

Making it worse is the fact that China property market is in a downturn (2023)

Malaysia economy and Ringgit is actually pretty similar to China in this way.

China intentionally keep its Renminbi Weak versus USD as it is an export heavy nation, making China goods cheap in the global market.
Malaysia also export heavy economy, see the similarity?

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Ringgit is supposed to be weak (but WHY?)

Don’t you understand, it’s meant to be weak! If our Ringgit is strong, all export businesses in M’sia die already lo!

The outlier here is Japan that kept its interest rate intentionally low to keep its inflation at 2%…

…after suffering ‘Emotional Damage’ from severe deflation, making its economy stagnant for decades.

That is why you see Ringgit has depreciated against USD, SGD, Euro and Pounds sterling

…but NOT against China renminbi yuan or Japanese Yen.

That being said, export-based businesses in Malaysia may also contribute to the problem of Ringgit weakening.

But how?

Well, that happens when Malaysian exporters are reluctant to repatriate their earnings to Malaysia during a weak Ringgit season.

Explained: exporting companies are paid in US dollars but do not immediately exchange it for ringgit and bring it back to Malaysia. When that amount is big and continues (to grow), it weakens Ringgit.

And it is routine for central bank (BNM in this case) to monitor flows of money such as exports and foreign direct investment (FDI), and this is what the central bank meant when it said it would ‘intervene in the forex market’

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To what extent BNM intervene?

Back in December 2016, BNM intervened by mandating that local exporters must convert 75% of the revenue generated from exports into ringgit and only 25% is allowed to be retained in foreign currency.

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Also, any ‘forex intervention’ by a central bank will trigger the attention of currency traders, speculators, and hedge funds. It could worsen the situation by attracting speculative currency attacks.

Given Malaysia is a relatively small country without large foreign currency reserves (like China), we are quite vulnerable actually.

On the contrary, countries with huge foreign currency reserves are able to use it to flush out speculators, else it is a losing battle.

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A good example of US billionaire George Soros in 1992. He shorted an enormous sum of money via his Quantum Fund against the pound sterling.

In the process, he pocketed over 1 bil dollars profit and gained the reputation as the man who broke the Bank of England.

He also bet against a basket of Asian currencies, specifically the baht and ringgit, just before the 1997-1998 Asian Financial Crisis, which caused financial crisis in Thailand before spreading to the rest of Asia.

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Weakening Ringgit is a Bigger Issue Today versus Early 2000

As mentioned, taking Malaysia as example, a weak ringgit had boosted the country’s economic growth as it made Malaysian-made goods more competitive in global markets and in turn, lead to stronger exports.

However, the volume of exports has been reducing, with the economy becoming more reliant on domestic consumption.

Evidently, in 2000, Malaysia exports value was at 119.8% of the country’s gross domestic product (GDP), according to the World Bank.

By 2021, it had decreased to 68.8%.

The value of imports relative to the GDP has also declined at the same time, where most imports were intermediate products that were used in the manufacturing sector to be exported later.

In 2000, imports were valued at 100.6% of the GDP and by 2021, it had declined to 61.7%.

In other words, data shows us contribution of exports to Malaysia’s economy has declined over the last 2 decades while imports of food items have increased rapidly, so the benefits of a weak currency are diminished.

Another fact to know is this: Malaysia’s exports are now cheaper compared to 20 years ago but most of Malaysia’s manufactured exports are part of the global value chain (partially processed products) dominated by multinational corporations (MNCs), instead of finished products, so the domestic value added is on the low side.

Consequently, while a weakening ringgit makes exports ‘cheaper’ on the global market (which leads to higher demand), it also makes the required imported inputs for domestic ‘partial processing’ more expensive.

Additionally, any countries which is heavily dependent on commodity exports for their economy will experience higher fluctuation on its domestic currency’s exchange rate.
Country like Malaysia, with 70% trade surplus in commodity exports (major contributor to GDP).

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The other thing is that for Malaysian businesses exporting to China or Japan in renminbi or yen, there is no net gain from weakening Ringgit because the Chinese & Japanese currency have not appreciated much against Ringgit.

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Why Interest Rates Need to be Changed from time to time?

Why central banks so buntut gatal want to change interest rates? Can’t they keep it constant?

Well you have to understand, the primary reason central banks exist is setting monetary policy –

interest rate is just one of the tool besides central bank’s forex intervention.

Central banks adjust their monetary policy based on economic data – inflation, employment, GDP –
the end goal is to keep:

• domestic prices not too high, not too low
• economy is growing not too slow, not too hot and
• last but not least, qualified people got jobs

…else there will be chaos in the society.

So you see, forex exchange rate & interest rate is like Siamese twin.

You can’t have a strong Ringgit AND a Low Interest Rate, it’s like against the Law of Nature.

You choose your poison:
Strong Ringgit and a High Interest Rate –

…which means cheap for you to travel overseas or buy your foreign goods, but your Mortgage repayments make you cry…
In other words, Strong Currency Comes with High Cost of Living and vice versa

Or you choose Weak Ringgit plus Low-Moderate Interest Rate.

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Political Reason behind Weak Currency?

The other angle to look at the Reason for Weak Currency is this:

Politically speaking, very few, if any, government in the world have the guts to hike interest rate too much just for the sake of strengthening its currency – as this causes High cost of borrowings.

Why? It is politically unpopular to make its citizen ‘suffer’ financially by paying more on their existing loans that result in less money to save or buy that concert tickets when their income is NOT growing.

For Malaysia, high value high income jobs are not created in the country due to lack of foreign money invested into the country,

And with dependency on foreign cheap labor, how can wages, salary grow?

Any ruling government needs popular votes to stay in power see?

Heck, don’t you know that every time central bank hike interest rate,

…government itself also suffers as their interest expenses also go up when it needs to pay more interests on its very own government debts.

So imagine you are the Prime Minister in a populist government that needs to win next general election, what you do?

You take the easy way out – ‘kick the can down the road’

Everything stays as it is – nothing change, so you pass this problem to your successor, never mind if it’s 20 years from now – same problem (Wawasan 2020 anyone?)

In the meantime, ringgit continue to be weak lah!

Central banks can try to intervene to strengthen their domestic currency but that depends on the ‘dry powder’ they have in the form of foreign currency reserves. Example, like what Bank Negara Malaysia did here but the effect is negligible (from 4.67 to 4.66 MYR vs USD)

Local institutional funds or pension funds such as Employees Provident Fund (EPF KWSP) could also shift its strategy to invest more in domestic assets or even sell some of its foreign assets, thereby creating Ringgit demand but there is not something that can happen overnight.

The BNM Forex scandal in 1990s

It’s almost unbelievable if you now recall that it was RM 2.50 vs 1 USD 30y ago.
In 2017, do you know that a royal commission of Inquiry (RCI) was formed to investigate the scandal and discovered that:
◾️ BNM forex suffered a massive RM 32 bil loss from 1991 to 1994.
◾️ But the only figure cited as losses was in1993 with RM5.7 bil
◾️ BNM’s forex trading activities were conducted in a hush-hush manner where hardly anyone knew about it apart from the in-house dealers, banking department head, and then BNM governor Jaffar Hussein.
◾️ It had depleted 2/3 of BNM’s reserves
◾️ the huge losses were downplayed by BNM governor, who resigned in 1994 and died in 1998.
◾️ Tun M then finance minister Tun Daim said they were unaware of this.

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Why US Dollars & Singapore Dollars always so Strong?

For USD, it is easy – because it is the World’s Reserve Currency. There will always be sustained demand for it as all international trades are conducted in USD.

Law of Supply & Demand always prevails – High Demand = Increase or Sustained in Value & Price, and vice versa.

Lastly, how can Malaysia ignore its BFF, Singapore?

It is always 3-ish ringgit vs 1 SGD because Singapore actually does NOT play by the rules
Why? Because Singapore does NOT use Interest Rate system

Instead, Monetary Authority of Singapore invented something called Managed Float Exchange Rate using BBC system that keeps SGD forex rate within a policy band based on a basket of currencies of its major trading partners and competitors.

Anyway, this is like the infamous 3.8 ringgit vs 1 USD currency peg like what Tun M did in 20+ years ago but more sophisticated.

But you got to give it to Singapore because SGD so strong due to its Surplus Budget or just slight Deficit.

Money flows into Singapore, in the form of FDI and even Foreign Indirect Investment – as the regional business and financial center.

Now I’d like to hear what you have to say.

What do you agree or disagree with?

Let me know by leaving a comment below.

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