Mitigating the effect of a weaker ringgit

THE weaker ringgit has caused foreign firms exporting to Malaysia, Malaysian tourist abroad and the foreign investor in Malaysia to suffer.

Their sufferings need to be addressed, something better than the opposition’s call for the government to tinker the exchange rate to make the ringgit stronger.

This is a zero-sum game, as it will transform the misery of the sufferers into a state of bliss at the expense of those who are already in a blissful state with a weaker ringgit.

The Malaysian authorities could negotiate with local importers to diversify by increasing the import of goods and services crucial to Malaysia at competitive prices, eg animal feed, food and agricultural products, and raw materials for the high-tech industry.

Importers of luxury goods and services should be encouraged and incentivised to become exporters of any goods and services crucial to Malaysia’s trading partners.

Develop local tourist resorts to mimic overseas destinations, such as a skiing resort with artificial snow.

Having holiday resorts that are adapted to the western environment will also encourage more western tourists to come to Malaysia for a longer period for another purpose, and the government can campaign as such.

Also, Malaysian investors abroad can diversify into holiday resorts overseas and then give Malaysian tourists abroad a hefty discount to these places when the ringgit is weaker.

The foreign investor in Malaysia can be given an incentive to invest in the high technology sector.

Singapore is a good lesson on how to avoid the pitfalls of a stronger currency.

In the 1960s and 1970s, Singapore was the only industrial based country surrounded by agricultural and commodities-based neighbours.

It went on an industrialisation spree by welcoming multinational companies (MNCs), while most Asian countries resorted to import substitution.

Furthermore, for the newly independent Asian countries then calling the foreign MNCs to operate in their countries smacked of neo-colonialism.

Singapore’s approach was better and the country progressed with a relatively stable currency.

Meanwhile, when other countries copied the Singapore model it initially led to a stronger Singapore dollar because it still had the edge in attracting established MNCs.

However, if a strong currency is maintained, it will lead in the long run to an erosion of export competitiveness, thus damaging export-dependent industries and thousands of jobs are lost.

Yet, this did not happen to Singapore as its leaders restructured the economy to move up the value added chain from a labour intensive industrial economy to capital intensive during the 1980s and 1990s.

Singapore never saw its neighbours as a competitor but instead as complementing the city-state’s economy.

It never resorted to beggar-thy-neighbour policies usually achieved by encouraging consumption of domestic goods over imports using protectionist policies.

It relocated its labour-intensive industries to neighbouring countries and helped them in setting up industrial parks, along with its successful ambition to make the country a vibrant international financial hub.

Thus, the Singapore dollar maintained its strong standing globally. When its neighbours decided to follow suit, the republic once again restructured its economy to high technology and then again to the service industry.

Singapore also chooses the exchange rate as the principal tool of monetary policy, due to its small size and high degree of openness.

Singapore’s exchange rate policy is to preserve the currency’s purchasing power in order to maintain confidence and preserve the value of workers’ savings.

First, the country’s high savings rates in the public sector due to the government’s budgetary surpluses, along with the contribution of companies and households to the mandatory Central Provident Fund (CPF), have led to the continual withdrawal of liquidity from the banking system.

The Monetary Authority of Singapore (MAS) accordingly injects liquidity into the market by selling Singapore dollars and buying US dollars to offset government and CPF flows.

It adopts a medium- to long-term monetary policy, anticipating a six- to nine-month lag between implementation and impact, which has helped reduce the volatility of the exchange rate, anchored the economy and provided certainty.

Singapore’s exchange rate policy is effective due to the broader framework, including flexible prices and wages, a deep and efficient financial market, a robust corporate sector and prudent financial policy.

The MAS has successfully ensured macroeconomic stability in the past decades, including during financial crises.

Yet, Singapore also provides a reason why a stronger currency is not necessarily better.

The MAS reported a net loss of S$7.4 billion (RM23.9 billion) in the financial year ended March 31, 2022. Additionally, Singapore’s official foreign reserves (OFR) also recorded a net loss of S$4.7 billion.

The MAS OFR is held in foreign currencies, three-quarters of which are US dollars.

The appreciation of its currency means the republic receives fewer Singapore dollars when converting foreign currency, so the OFR saw a net loss of S$4.7 billion despite making a profit of S$4 billion in foreign investments.

In turn, this is the reason the MAS would not be contributing to the CPF this year but the government will still receive S$1.1 billion due to the previous years’ profits.

Yet, overall, this policy has brought tremendous benefits to the country.

It is how the negative effect of a stronger or weaker currency is mitigated that matters and with a strong reserve to begin with Singaporeans would not be affected that much by the loss of its OFR due to a stronger currency.

A stronger or weaker currency is a different ballgame, and neither is intrinsically good or bad. – September 20, 2022.

* Jamari Mohtar is the Editor of Let’s Talk!

* 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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