A weak ringgit is not a bad thing


NOT many Malaysians know the downsides of a strong currency. It can exert significant drag on the economy over the long term as entire industries are rendered non-competitive and thousands of jobs are lost.

While some might prefer a strong currency, a weak currency can result in more economic benefits.

A stronger ringgit is a bane for exporters. When the exporter earns foreign currencies via export sales, and then converts them back to ringgit to pay workers, suppliers, and investors, the stronger ringgit means that the weaker foreign currency buys fewer ringgit, and the firm’s profits (as measured in ringgit) fall. As a result, the firm may choose to reduce its exports, or it may raise its selling price,.

For a foreign firm exporting to Malaysia, a stronger ringgit is a boon. Each ringgit earned through export sales, when traded back into the domestic currency of the exporting firm, will buy more of the domestic currency. The firm will earn higher profits than expected. It will then seek to expand its exports to Malaysia or it may reduce prices

For a Malaysian tourist abroad, a stronger ringgit is a benefit. He receives more foreign currency for each ringgit. It’s a good time to travel abroad.

For foreign visitors, their currency buys fewer ringgit when the currency is strong.

For Malaysian investing overseas,  a stronger ringgit is a curse as he must convert ringgit to a foreign currency for investment in the foreign country. If the ringgit becomes stronger when the investor converts the foreign currency back to it, he earns less.

For foreign investors in Malaysia, a stronger ringgit is a blessing for a foreign investor as it will boost his returns when he converts from his domestic currency to ringgit for investment in Malaysia and when he converts back to his domestic currency.

What all this means is that three groups of people experience bliss while the other three experience misery when the ringgit is strong or weak.

So politicians who accuse the government of not knowing what to do to “strengthen” the ringgit are barking up at the wrong tree.

The government correctly sees the weakening ringgit as a non-issue as it will not lead Malaysia to an economic crisis.

It is fashionable nowadays in this era of financial crisis to see one country’s currency stronger, and this has become somewhat populist, especially at a time of an election fever.

In economics, awe’ve got to be very careful when there is a sudden 20% decline in the ringgit because that will be as good as a devaluation of the currency that could lead to imported inflation for countries that are substantial importers.

One other thing the politicians clamouring for a stronger ringgit have got wrong is that it is not the ringgit that is weakening but the dollar that is strengthening.

For the US, the massive sanctions it has imposed on Russia are not only hurting Russia but the effects have boomeranged back to them in the form of an unprecedented spike in energy and food prices causing galloping inflation that has not been seen in many years.

This inflation can only be tamed with higher interest rate and the US Federal Reserve is sticking to aggressive rate hikes as inflation stays hot.

The Fed is expected to deliver a third straight 75-basis point interest rate hike, if not more, this week after a US government report showed that consumer prices did not ease as expected in August and that price pressures appeared to broaden.

Is Malaysia the worst affected country in terms of currency depreciation against the US dollar?

As pointed out by the finance minister, while the ringgit has depreciated by 7.5% against the greenback since the beginning of 2022, many currencies in the region and developed countries have also fallen against the greenback.

Malaysia is actually doing well in comparison to Japan, UK and EU.

Also, the ringgit has strengthened against the currencies of Malaysia’s other trading partners such as Japan, the UK, the EU, New Zealand and South Korea.

Additionally, strong economic fundamentals will determine the robustness of the ringgit.

These include GDP growth, which has been rising every quarter since the last quarter of 2021, an unemployment rate of 3.7% in July,  the lowest since the start of the Covid-19 pandemic, a healthy rise in the Industrial Production Index, robust wholesale and retail trade, and rising export figures.

The country’s inflation rate was also manageable at 2.8% for the first seven months of the year due to price control measures, particularly through the provision of almost RM80 billion in subsidies.

The problem of rising cost of imported food predates the slide of the ringgit. 

In fact, rising cost of living is a perennial problem. – September 19, 2022.

* Jamari Mohtar reads The Malaysian Insight.


 

* 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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Comments


  • It is a known fact a wildly volatile currency, whether appreciating or depreciating, is disruptive on the economy. But a slowly strengthening one is good. For example, it keeps inflation at bay.

    Compare MYR and SGD. In 1981, they were at parity (a black mark on Mahathir who became PM at that exact year).

    Over the course of decades, the stronger and stronger SGD attracted Malaysian "brains" to work there to develop Singapore. (The future Singapore PM's father is Malaysian born.)

    On the other hand, foreign fugitives and criminals hide and work in our plantations.

    Posted 2 months ago by Malaysian First · Reply