Don’t cry for a weak ringgit

Wong Chin Yoong

The writer says the ringgit’s bounce from RM4.78 per dollar in November 2022 was not a vote of confidence in PM Anwar Ibrahim’s government. – The Malaysian Insight file pic, June 8, 2023.

WE probably have enough of a weak ringgit, and hence are not having enough arguments on why the ringgit is so weak against the dollar.

Don’t blame politics because, well, who would genuinely believe global investors and forex traders going in and out of the market daily would care about Malaysian politics.

So, when the ringgit started bouncing back from RM4.78 per dollar in November last year, it was not a vote of confidence on Prime Minister Anwar Ibrahim’s unity government.

By the same token, the ringgit’s recent slide since April cannot be attributed to market doubt about the Anwar administration and policies. It does not mean the markets worry about our state elections.

Our politics doesn’t matter in the sea of forex trading with a daily trading volume of more than US$5 trillion (RM23.06 trillion).

Some would also argue that the ringgit’s weakness reminds us of the urgency of structural reforms.

We need to escalate our battle against corruption, so the argument goes, as a clean and efficient government would win the hearts of investors.

We need to accelerate the realisation of RM170 billion in foreign direct investments from China so that cross-border commercial investments would broaden exporting capacity, strengthening the demand for ringgit.

We need to consolidate our fiscal position, as a heavily indebted government would push bond investors away.

Although these arguments sound serious and logical, and to some extent underlie the fundamentals of ringgit over a very long term, on second thought, their relevance become untenable and are demonstrably inconsequential to ringgit’s cyclical swing.

It is not too bitter to appreciate the fact no one would buy the ringgit simply because the prime minister repeatedly talks about and sometimes acts towards his determination of going against corruption.

Ethical consideration doesn’t enter the equation of daily forex trading.

And RM170 billion in foreign direct investments over the next five or more years would certainly not be helpful in stabilising the daily ringgit swing once we take into account the volume of forex trading.

While net foreign direct investment inflows were about RM74 billion a year, the daily trading volume of ringgit has been RM70 billion per day.

Net foreign direct investment inflows can hardly stir up any meaningful ripple effect on the ringgit movement.

Likewise, maintaining a trade surplus is no guarantee of a ringgit appreciation. After all, we have had a trade surplus since the Asian financial crisis.

And never forget that trade surplus, from the macroeconomic perspective, is the mirror image of internal surplus.

No one expects a strong currency for a country operating regularly under full-potential capacity.

Perhaps more counterintuitive is the fact that decades of budget deficits and the mounting public debt stock of more than a trillion ringgit didn’t really come at the expense of ringgit.

Unlike the case of Argentina, for instance, where the government denied access to the bond market monetises the debt to finance public spending that results in hyperinflation and plummeting peso, Malaysian government bonds have always been the investment-graded assets highly sought after by investors globally.

Should fiscal sustainability – in the form of showing political willingness towards spending consolidation and having an improving taxation capacity – be kept aligned with market confidence, bond issuance associated with a budget deficit that attracts foreign investors is a force of strong not weak ringgit.

When you have eliminated the impossible, according to the “Holmesian theorem”, whatever remains, however improbable, must be the truth.

The highly probable US Federal Reserve’s monetary tightening, therefore, is the most possible reason for the sliding ringgit.

The weak ringgit is the mirror image of a strong dollar.

Here’s the Economics 101: exchange rate fluctuations reflect the differences between two interest rates, while the interest rate differentials indicate the varying economic circumstances between two countries.

Exactly because our inflation rates are less concerning vis-à-vis the United States, the pace of interest rate hikes differs, ringgit-dollar rates thus swing more swiftly.

But it is a virtue, not a vice.

Exchange rate flexibility gives us room for policy manoeuvre for addressing internal economic needs.

If out of the fear of currency floating, we try to unnecessarily raise the interest rate to match the Fed’s, currency stability would come at the massive expense of economic chaos.

I can’t see any possibility that an economy in peril can have a strong currency.

Following this train of thought, we can also comprehend why the ringgit remains weak against a weakening dollar while other regional currencies seem to rebound.

It’s still a matter of inflation and interest rate differentials: when we celebrate milder inflation rates compared to regional countries, we are also less likely to keep the pace of interest rate hikes amid the Fed’s softening monetary stance.

So, how can we blame the weak ringgit when it indicates our ease in inflation? – June 8, 2023.

* Wong Chin Yoong is a professor of economics at Universiti Tunku Abdul Rahman, Kampar campus.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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