THE sharp weakening of Malaysia’s ringgit has reached an unprecedented low based on its Real Effective Exchange Rate (REER), according to data from the Bank of International Settlements. 

In a statement, the Malaysian Rating Corporation Bhd (MARC) said the REER is a measure of the exchange rate value weighted by trade and adjusted for inflation.  

“On one hand, it explains that exports from Malaysia are now cheaper relative to history and relative to its peers; it also implies that imports are increasingly more expensive, affecting businesses and consumers.  

“As such, while weaker ringgit is said to be an automatic stabiliser since it theoretically raises the value of exports, it exacerbates imported inflation at a time when inflation is a global and local concern, especially since inflation is significantly driven by cost-push pressures and is affecting Malaysia’s rising cost of living,” it said. 

It added that the automatic stabilisation effect of a floating exchange rate is an elegant theory, which suggests it has limitations in reality. 

“A weaker exchange rate is only a temporary adjustment to prices to maintain competitiveness. Competitiveness, of course, has several facets, such as policy stability as well as infrastructure and tax rates, and needs to be distinguished from merely having cheap exports.  

“If a country were to rely on a weaker exchange in the long term, it is then pursuing a race to the bottom. This contradicts not just the fundamental concept of raising a country up the value chain but relegates a country to de-development,” it said. 

MARC said the idea that exchange rate depreciation benefits a country was not holistic: it can only provide a limited boost to the current account balance.  

It said a defensive narrative that was bandied around is that Malaysia is a victim of circumstances, namely higher interest rates in the US.  

However, it pointed out that all countries were facing a similar challenge, but it ought to be mentioned that as of the last week of June, the ringgit was the second-worst performer in Asia year-to-date after the Japanese yen. 

“Perceptions of Malaysia’s economic standing and ringgit performance are related to the degree of international confidence in Malaysia. Besides the issue of weaker external balances, debt sustainability, and public financial strength is weakening,” it said. 

MARC hopes postponement of the tabling of the Fiscal Responsibility Act from June 2023 to the year’s end is a precursor to a well-considered plan rather than an indication of coordination challenges. 

The ringgit this morning opened marginally higher against the US dollar. 

At 9am, the local unit rose to 4.6615/6650 versus the greenback compared to 4.6635/6705 at last Friday’s close. – July 3, 2023.