Internationalisation of ringgit reimagined (Part 2 of 3)

Wong Chin Yoong

Although an internationalised ringgit could be more volatile than the inconvertible one as order flows accelerate ensuing offshore participation, volatility invites arbitrage, and arbitrage limits volatility. – The Malaysian Insight file pic, July 20, 2023.

THE ringgit has been regaining strength in the past week as the data released in the United States show that the inflation rate is contining to drop and seems no longer too hot for the Federal Reserve.

Being overshot for some time, the ringgit would have greater odds to bounce back more robustly.

Like it or not, the US monetary policy will remain in the equation of ringgit fluctuation for many years to come. After all, the US dollar is the currency of the world. Their currency is still our problem.

So what should be concerning is not the headline ups and downs of the ringgit but the longer trend of the currency.

It has been decades for the local note to wave hello to the dollar value of the ringgit of the 1990s, but it seems like we can only be waving to the past but not the future.

The question is, why? In the 1990s, we were 28.7% of the US GDP per capita measured by purchasing power parity in 2017 prices. Today, we are 45%.

All other macroeconomic indicators point in the same direction too: goods price ratios are in favour of us, the trade balance has been in surplus for decades, foreign businesses never stop investing here, the fiscal budget is in deficit with favourably rated sovereign bonds and foreign currency-denominated debt is systemic-wise negligible.

If economic fundamentals underlie the currency value over the long run, as the stock market does, we shall need less than RM2 for a dollar.

Except it is not. Blame not the fundamentals but, as I suspect, the lack of market participation that fails the ringgit exchange rates to play the role as the price signal device of Malaysian economic fundamentals.

Which brings me to the rethinking of ringgit internationalisation.

By internationalisation, I mean allowing the ringgit to be freely convertible in the offshore market so that ringgit securities can be a store of value, commercial and financial exchanges can be invoiced in ringgit, and ringgit can be a choice of currency for settlements.

What is legally allowed now resembles partial convertibility, where non-residents abroad can only carry out currency exchanges through the appointed overseas offices of the participating onshore banks approved by Bank Negara Malaysia.

Ringgit instruments, however, are not allowed to be traded offshore, and all settlements in trade can only be made in foreign currency.

It was not so indeed prior to the Asian financial crisis.

When capital and exchange controls were implemented in September 1998, the rationale given was to regain monetary independence once the ringgit was pegged to the greenback.

This was undoubtedly a justifiable position when thinking through the Mundellian trilemma framework, where the policymaker can only opt for any two of monetary independence, fixed exchange rates and capital account openness.

But it was then. The world is different now.

We no longer maintain a currency peg. The value of the ringgit is completely market-driven, with Bank Negara’s intervention only to moderate excessive volatility. And we have long regained our monetary independence in the world of flexible exchange rates.

Otherwise, we would have hiked the interest rate as much as the Fed did, instead of the current 3% based on domestic economic circumstances.

Wouldn’t a freely convertible ringgit then invite a speculative attack that crashes the currency?

Well, an effective speculative attack works only when the current fixed level of exchange rate is incoherent with the economic fundamentals, and hence gives room for a profitable short position.

But an exchange rate floating all the time to reflect fundamentals has no room for effective speculative attacks. No arrows can hit a randomly moving bullseye.

Although an internationalised ringgit could be more volatile than the inconvertible one as order flows accelerate ensuing offshore participation, volatility invites arbitrage, and arbitrage limits volatility.

So while the downside risk of an internationalised ringgit is containable, the cost of an inconvertible ringgit, I am afraid, has been rising.

For instance, exporters who intend to invoice and settle trade with non-residents in ringgit will not be able to do so, as ringgit settlement and trade financing are not permitted.

It becomes utterly pointless to talk about de-dollarisation when the ringgit cannot even be used for trade invoicing, settlement and financing.

And exporters who settle trade balances in dollars are understandably reluctant to exchange for ringgit deposits, as ringgit securities cannot be traded, not to mention the restriction of offshore currency risk hedging.

No wonder decades of trade surplus are not translated into a stronger ringgit.

Without ringgit securities, currency traders who believe that the ringgit has been overshot and undervalued have no access to the long position.

Arbitrage is simply too difficult to be established for the ringgit to make a comeback.

Ignoring this issue comes with our own perils. The next question is, how should we re-internationalise the ringgit? – July 20, 2023.

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

* 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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