THE deteriorating ringgit is unlikely to have an immediate impact on the livelihoods of the low- and middle-income earners but continued fall could cause inflation to escalate, economists said.

While currency depreciation would cause see the cost of imported goods to go up in the short-term, it was up to the importers to absorb the difference or pass it on to consumers, they said.

As for strengthening the ringgit, there is little the government can do except ensure political stability and food security.

Universiti Malaya economist Dr Rajah Rasiah said a shrinking ringgit would not have an immediate impact on the lower-income groups.

“The weakening ringgit against the USD is unlikely to affect very much the livelihoods of the B40 and M40 groups immediately though a prolonged deterioration of the ringgit will generate negative indirect effects from escalating imported inflation,” he told The Malaysian Insight.

Rasiah said the effect of the new minimum wage would only be seen on low-wage earners in the formal economy, and the group was not large enough to affect inflation.

Malaysia is not the only country suffering from a depreciating currency, he said, as Southeast Asia is only now emerging now from the economic effects of the Covid-19 pandemic. 

“All Southeast Asian countries are facing either stagflation or imminent stagflation from rising unemployment and rising inflation, but much of it is caused by rising oil and gas prices and creeping shortages in food.”

The Singapore dollar hit an all-time high last week when it traded at 3.1688 against the ringgit. 

The US dollar was trading at 4.35 against the ringgit on Tuesday.

Calvin Cheng, a researcher at the Institute Of Strategic & International Studies, said inflation could rise if importers chose to pass the cost to consumers.
 
“In the medium-term, a weaker ringgit may have positive impacts on exports through greater price competitiveness of Malaysia’s exports, in turn having positive impacts on demand and trade surplus.

“This may filter through to households via stronger economic activity or wage growth,” Cheng said.

It is likely that the ringgit would remain volatile over the coming months – weakening some months against the dollar and strengthening in other months – so these impacts will likely be transitory or shifting, he said.

The Ukraine war, shrinking global supply and soaring freight prices have led food prices to surge globally.

The United Nations estimated that food costs will rise 22% as war stifles trade and slashes future harvests.

“Economic sanctions from the US and its Nato allies on Russia have only aggravated the situation, which has caused inflation to soar with serious shortages in sunflower and rape seed oil (as well as) exports of wheat and fertilisers.

“(Export of) oil and gas from Russia is also facing rigidities following Russia’s insistence on all transactions to be settled in the Ruble,” Rasiah added.

Political stability

Cheng said there is nothing much the government or central bank can do to strengthen the ringgit in the short-term besides ensuring political and macro-economic stability.

“As for the central bank, it may be able to sell foreign exchange assets or purchase the ringgit to stabilise devaluation pressures.

“In the medium term, it can also raise the overnight policy rate (OPR).

“In the long term, the government can look towards strengthening Malaysia’s economic fundamentals.

“A stronger currency ultimately depends on high productivity growth, macroeconomic and political stability, and economic competitiveness,” he said. 

As for the OPR, the central bank has maintained it at 1.75%. However, BNM is expected to raise the OPR in the second half of 2022 by 25 points to 2%.

To peg or not to peg?

Rasiah said the is no need for now to peg the ringgit against the US dollar.

“The prime reason for the USD to rise is a result of the US Federal Reserve raising interest rates to contain inflation.

“Malaysia’s international reserves have risen strongly since 2020 to insulate the country from external exposure while non-performing loans (NPLs) have remained low since 2000 and external debt service has also remained low.

“Hence, I do not see an imminent financial crisis.”

During the 1998 Asian financial crisis, then prime minister Dr Mahathir Mohamad pegged the ringgit against the US dollar. The peg stayed until 2005.

It was removed by former prime minister Najib Razak citing loss of investor confidence in Malaysia.

Malaysia, as an oil-producing country and one of the largest exporters of palm oil, is expected to benefit from the rise in prices of the global commodity, Rasiah said.

“Petroleum and palm oil have been enjoying rising prices and surpluses owing to shortages in the global economy.

“It is my hope that the government uses this crisis to quicken the shift to digitalisation and IR4.0 technologies a la Taiwan to raise industrial productivity while reducing dependence on foreign workers. 

“The government should also ensure that technical and vocational education and training institutes expose our workers to IR4.0 skills,” he said.

Cheng said data suggest that manufacturers stand to lose the most from the weakening currency.

“From an economic standpoint, sectors that have higher percentages of imported inputs coupled with lower exports will be the most negatively affected.

“This suggests that manufacturers of transport equipment, metals, and minerals are likely to be most affected.” – May 5, 2022.