THE continued depreciation of the ringgit against the US dollar in the last several weeks is largely driven by hawkish measures by the US Federal Reserve to stave off inflation, economists said.

Capital flight, due to political instability, and currency devaluation are also driving the ringgit down, they said.

However, they said it has not reached a point where the ringgit has to be pegged, like it was during the 1997-98 Asian financial crisis.

AmBank’s chief economist Anthony Dass said the Fed will most likely continue to raise interest rates.

“The recent weakening of the ringgit was driven by several factors, including the strengthening of the dollar due to hawkish tone of the Federal Reserve as investors now are expecting the Fed’s funds rate in the US to increase much faster,” he told The Malaysian Insight.

The ringgit was trading at RM4.37 against the dollar yesterday.

The Fed raised rates half a percentage point in May, its highest rate increase since 2000.

Fed officials have made clear that they will do what it takes to tame inflation, which hit 8.5% last month, the fastest 12-month pace since 1981.

Last week it said it would move ahead with multiple 50 basis points interest rate hikes.

Dass said the ringgit is also closely tied to the Chinese yuan.

“Any weakening of the yuan should also be seen as the weakening of the ringgit.

“Ringgit is not the only currency that has depreciated. We saw outflows from most emerging economies, and their currencies also depreciated against the US dollar.”

However, the strong oil price has provided some buffer for the ringgit weakening, he said.

No peg

Universiti Malaya Asia-Europe Institute professor of economics Rajah Rasiah said capital flight is causing the ringgit to slide.

But pegging the currency against the dollar is not the right move as Malaysia could instead end up wasting billions in reserves to defend the peg.

During the 1998 Asian financial crisis, then prime minister Dr Mahathir Mohamad introduced the controversial measure to gain investor confidence.

The peg was removed in 2005 after investors took their money overseas.

“It will be difficult to stabilise the exchange rates by imposing a peg as we did in 1998 as this will require capital controls – controls on currencies,” Rasiah said.

“Bank Negara Malaysia may face severe pressure from speculators unless such controls are imposed, the type Britain faced in 1992 when John Major was Prime Minister or what Indonesia, Malaysia, South Korea, Philippines, and Thailand faced in 1997.  

“Otherwise, Malaysia will have to spend a huge amount of its international reserves to defend the peg.”

In September 1992, the collapse in the pound sterling forced Britain to withdraw from the European Exchange Rate Mechanism.

The UK government expended billions of pounds worth of foreign exchange reserves in an ultimately futile attempt to prevent the crash, to no benefit of the public.

RHB Bank’s wealth insight suggests that the recent decision by the central bank to raise its overnight rate policy (OPR) to 2% would put a ceiling on the ringgit from coming off significantly.

The retrace in USD/MYR could take the pair gradually on an intraday basis (buying and selling on the same day) towards 4.350, 4.300 and eventually towards our end-2022 target of 4.100 over the medium term, the bank said.

No recession yet

Rasiah said a clear indication that the country is headed towards recession is when the GDP contracts for two consecutive quarters.

In the case of Malaysia, it is on track to meet its growth targets of between 5.3% and 6.3% this year, which means while it is experiencing stagflation (slow economic growth, high unemployment and rising prices) , it is not nearing recession, he said.

“Malaysia enjoys a healthy build up in current account surpluses, and hence international reserves that exceed US$107 billion in February 2022, which can pay for over seven months of imports,” he said.

“While its debt to GDP ratio continues to rise, its external debt service ratio to GDP is low because most of its debt is denominated in Ringgit.  

“Hence, while  stagflation and with that a depression appears imminent, I do not think that Malaysia is facing the economic bottom of 1997-98 as its international reserves continue to grow while its external exposure is low.”

Dass  said export figures reached double digits for nine straight months, standing at 21.7% in April, suggesting that the economy is strong.

“Further, the reopening of the economy, good Covid management reflected in the high vaccination rates, improving labour market, strong foreign direct investment inflows and positive equity market with net foreign buying point to the fact the Malaysia’s economy is on the right for a full recovery from the adverse effects of Covid-19.”

Following the Asian financial crisis, we have taken more prudent and solid measures; this will certainly lower the risk of a recurrence of what happened in 1997, he added. – May 31, 2022.