Internationalisation of ringgit reimagined (Part 1 of 3)

Wong Chin Yoong

While it is widely acknowledged that the weak ringgit was a consequence of a strong dollar due to the Federal Reserve's interest rate hikes, recent months have shown that the ringgit has been weakening against all major trading partners' currencies, suggesting a broader issue. – AFP pic, July 4, 2023.

THE steadily declining ringgit has been under the spotlight for some time.

One is told that depreciation could stimulate exports, bolstering production and creating jobs. 

When export prices are fixed in hard currencies, what exporters gain from depreciation is a greater ringgit-denominated profit margin, rather than cheaper export prices that would lead to increased foreign demand for our exports. The price advantage would disappear once all competing countries experience depreciation simultaneously, as is the case currently. 

On the flip side, prolonged depreciation, resulting in a weak currency, makes imports more expensive and shifts the demand inwards.

On one hand, this benefits the domestic economy. More people will opt to travel domestically rather than abroad while an advantageous exchange rate attracts inbound tourists, boosting tourism.

On the other hand, it creates stronger inflationary pressure. This is not only due to higher ringgit prices for imported goods and services but also increased aggregate demand for local goods and services, leading to persistently high core inflation, as observed in recent months.

More concerning in the long run is firms’ reluctance to import machinery and equipment or hire foreign talent when the costs become exorbitant due to the prolonged weakness of the ringgit.

This lack of knowledge transfer and spillover could hinder our efforts for industrial and technological upgrading.

These are all valid reasons for taking ringgit depreciation more seriously.

While it is widely acknowledged that the weak ringgit was a consequence of a strong dollar due to the Federal Reserve’s interest rate hikes, recent months have shown that the ringgit has been weakening against all major trading partners’ currencies, suggesting a broader issue.

The ringgit is weak because it is weak.

How should the authorities respond? Some suggest pegging the ringgit, while others propose intervention by Bank Negara. Both options are equally unfavourable.

Pegging the ringgit to the dollar is akin to building a bridge that allows whatever happens at the other end to affect us here.

In economic terms, it means Bank Negara would have to surrender its monetary autonomy and adjust the policy interest rate according to the Fed’s decisions on the federal funds rate.

What would a 5.25% interest rate do to our economy when our headline inflation is only 2.8%? It would be disastrous.

What about capital controls? Considering that portfolio capital has largely flowed out and bypassed us for investment in regional markets, what would be the point of reintroducing capital controls?

It would only damage our credibility in the financial market once more. That would mean bidding farewell to our dream of developing a global hub for Islamic finance, green finance, alternative finance, and more.

Could we intervene in the direction of the ringgit using our substantial dollar reserves?

The Financial Markets Committee has stated that Bank Negara will intervene in the foreign exchange market to curb excessive currency movements.

The answer is no. Moderating excessive depreciation does not equate to changing the course of the ringgit.

With such intervention, the ringgit would still depreciate, albeit at a slower pace, if such is the trend.

Fortunately, Bank Negara has no plans to utilise dollar reserves to artificially boost the value of the ringgit against its natural downward trend. Theoretically and historically, this approach would never work, regardless of the abundance of dollar reserves.

Nevertheless, the statement does highlight an interesting observation, wherein corporations and exporters are holding more proceeds in foreign currencies due to the increasingly attractive ringgit value of such proceeds.

While this hesitance may be attributed to the expectation of a weaker ringgit over an extended period, which allows holders to wait for a more favourable exchange rate, Bank Negara’s exchange control policy partly contributes to this situation.

By limiting offshore ringgit exchange, foreign currency holders are unable to acquire ringgit. Non-residential traders who believe the ringgit is misaligned with the fundamentals cannot take a long position on the ringgit, and exporters who prefer ringgit invoicing are discouraged.

All the factors that could contribute to a stronger ringgit are stifled.

What if the ringgit were to be re-internationalised? Would it then gain more strength and support? – July 6, 2023.

* Wong Chin Yoong is a professor of economics at Universiti Tunku Abdul Rahman, Kampar campus.

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