A Weaker Ringgit: How This Affects Malaysians
Recently, Benedict Weerasena (Research Director of Bait Al Amanah) was interviewed by SAYS.com on his perspectives on the declining ringgit and its impact on communities and businesses in Malaysia.
Factors Contributing to the Declining Ringgit
First, it is important to clarify the fact that the ringgit is declining mainly against the US dollar, and not against all other currencies. This is a similar trend to many other currencies in our region, which have also fallen against the dollar as the world's reserve currency.
Thus, the main reason why the ringgit is declining is the aggressive interest rate hikes in the United States leading to an outflow of funds from developing economies into the US. Another reason is the higher demand for US dollar-denominated assets. This is due to the perception that the US dollar is a safer currency in a world marked by uncertainty fueled by the Russia-Ukraine conflict and weakness in the global growth momentum.
The Impact of the Declining Ringgit
Overall, a weakening ringgit leads to higher import prices. It also adds to cost-push inflationary pressures because imported raw materials and intermediate goods become more expensive. Also, the purchasing power of Malaysian consumers has decreased, especially for those who seek to consume imported goods and services.
But rest assured that even if the ringgit worsens, Malaysia is highly unlikely to experience hyperinflation. This results from current policies that maintain price stability and mitigate cost pressures, such as the price controls on essential items and the fuel price ceiling.
On the other hand, a weaker ringgit, in general, will boost the competitiveness of export-oriented industries. According to Bank Negara, 36% of Malaysian workers and 42% of the labour income in export-oriented sectors will benefit from growth in net revenues, especially if they have few imports or if their imports are priced in the same currency as their exports.
Another positive outcome is a strong possibility that Malaysian consumers switch to demand local products more because imported goods and services are becoming relatively more expensive. This will in turn boost domestic economic growth.
What should the government do to address the situation?
Overall, there is little that the government can do as the current performance of the ringgit largely depends on external factors. Yet, the government can still focus on improving domestic fundamentals.
First, Malaysia needs a clear and sound economic direction to strengthen its investment potential. Second, political stability post-GE-15 would be a key factor in boosting regional competitiveness.
Most importantly, Malaysia should continue its flexible and market-determined currency, instead of a fixed system. A flexible ringgit exchange rate helps the economy to adapt better to changing conditions, facilitating appropriate external sector adjustments. Moreover, it buffers the Malaysian economy from the worst impacts of economic shocks.
A fixed system instead would take a toll on our foreign currency reserves, leaving our country in a more precarious position in the future. Also, a fixed currency rate would lead to the worst economic outcomes, such as declining competitiveness of export-oriented industries and losing confidence among investors and global markets.