Current ringgit weakness not a concern — economists

This article first appeared in The Edge Financial Daily, on August 19, 2019.
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KUALA LUMPUR: In times of economic uncertainty, a weak currency may ring alarm bells, raising concerns that a soft ringgit will result in higher cost of living and dearer imports. However, some economists concur with Bank Negara Malaysia’s view that the ringgit’s current weakness is nothing to worry about.

Like many of its peers around the region, the ringgit has depreciated against the US dollar. Year-to-date, it has retreated 1.07% to 4.1783 against the greenback, at the time of writing.

Global headwinds, such as the ongoing US-China trade war and rising fears of a global recession, have put pressure on the local currency. Economists acknowledge that should they persist, business sentiments will be further affected, causing external demand to slow even more, and central banks around the world will have to resort to rate cuts to rejuvenate economic growth, resulting in further volatility in the local note.

Still, Bank Negara governor Datuk Nor Shamsiah Mohd Yunus said last Friday the ringgit, which has moved in tandem with the region and is now somewhere in the middle of the pack, has played a key role in absorbing external shocks, and that it is one of the current strengths of the Malaysian economy.

“The ringgit has played a very key role in absorbing … it has played a key role as a shock absorber to ensure that the external developments and the external shocks that we see [do] not translate into disruptions in economic activities. That is actually one of the strengths of our Malaysian economy, that the ringgit remains flexible and can absorb these kinds of adjustments,” Nor Shamsiah said during a media briefing on the nation’s gross domestic product (GDP) performance for the second quarter of 2019.

“We have weathered a number of episodes of severe capital outflows, severe depreciation of the ringgit, and yet our economy continues to grow, and yet the financial market continues to function in an orderly manner. So we have not seen the kind of excessive volatility that has impacted economic activity here in Malaysia,” said Nor Shamsiah.

Socio-Economic Research Centre executive director Lee Heng Guie concurred, adding that a flexible exchange rate policy allows the economy to absorb the shock.

“Malaysia allows the ringgit to adjust according to the flows of capital, this would be a first line of defence in context of global uncertainty. Of course, it is also backed up by international reserves and account surplus,” he told The Edge Financial Daily when contacted.

Lee said Malaysia would only intervene in the foreign exchange (forex) should there be extreme movements in the exchange rate as the central bank will have to make sure there are no wide, excessive swings, as they would impact investments and capital flows.

He also agreed with the central bank governor that despite previous episodes of capital outflows and the severe depreciation of the ringgit, the economy has continued to grow.

According to the Statistics Department, Malaysia’s GDP for the second quarter grew at a faster pace of 4.9%, compared to 4.5% in the previous quarter.

Jameel Ahmad, global head of currency strategy and market research at FXTM, said the ringgit’s volatility has been contained so far despite a very challenging global environment, which helps prolong market continuity and provides consistency for economic fundamentals.

“It’s always important to look at the global picture for any economy, but for the purpose of this discussion the ringgit has seen losses of only 1.09% at time of writing against the near 8% losses in the Korean won. That 8% decrease in the value of the Korean won would bring challenges with inflation expectations, and import purchasing power if consuming goods from abroad. This sums up why the limited movement in the ringgit so far this year has helped absorb global challenges,” Jameel said in an email response.

He added that despite the trade war and global economic problems posing a challenge for most markets, the ringgit has not been as exposed to these concerns as the likes of the Singapore dollar, the Indian rupee, the Chinese yuan and the Korean won so far this year.

“I don’t see that trend bucking over the coming months. This means the ringgit can still outperform these currencies,” said Jameel.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the weak ringgit should help to improve the country’s competitiveness in key industries, such as electrical and electronics, rubber gloves, petrochemical, furniture, and to some degree, tourism-related sector such as medical and eco-tourism.

On whether the ringgit will strengthen, Mohd Afzanizam said this depends on the growth trajectory going forward and what government’s strategy to navigate uncertainties, which will affect whether foreign funds stay long on Malaysian assets.

“The upcoming Budget 2020 in October and the unveiling of the 12th Malaysia Plan next year are some of the important milestones that will determine foreign funds appetite towards Malaysian assets,” he said.