KUALA LUMPUR: There’s no need to impose capital controls to prevent further depreciation of the ringgit as the country’s economic fundamentals are still strong, said economists.
Capital controls are measures used by governments to restrict the flow of money in and out of a country.
Former CIMB Investment Bank Bhd chief economist Lee Heng Guie said there is not much the authorities can do to prevent the ringgit from falling further.
“Since we have adopted the flexible exchange rate regime, the ringgit has to reflect the volatility of the capital outflow and its fundamentals accordingly,” he told the digitaledge DAILY by phone yesterday.
“We cannot continue to use our [foreign currency] reserves to defend [the national currency] as that would deplete our reserves, which can lead to a loss of confidence in the ringgit,” said Lee.
“From the way the ringgit has been cracking, it indicates that Bank Negara Malaysia (BNM) has not been aggressively defending the ringgit. I think this is right as we have to allow the ringgit to take on the heat from capital outflows,” he added.
Foreign investors have pulled out a total of RM11.7 billion in funds year to date, compared with RM6.9 billion for the whole of 2014. According to BNM, the international reserves stood at US$96.7 billion (RM390 billion) as at July 31.
The ringgit fell past the crucial 4.0 level against the US dollar yesterday, raising concern that the central bank may need to reintroduce controls to avert capital flight. The ringgit slid to 4.0395, the lowest since 1998, when the government pegged the local currency at 3.80 against the greenback as part of the capital controls to ward off speculators and lift the country out of the Asian financial crisis. The peg was scrapped in 2005.
Dean of the School of Business at the Malaysia University of Science and Technology, Dr Yeah Kim Leng, said the weakening of the ringgit is mainly caused by overall investor sentiment and had nothing to do with the country’s current economic fundamentals.
“The main focus should be on addressing the underlying problems, such as regaining the confidence of investors and the public towards the country,” he said.
“I think the government has to reassure [investors and the public] that our economy is still resilient, and [that] our foreign reserves are enough to cope with the foreign fund outflows,” he said.
“The country still has an adequate foreign reserves buffer which BNM can use if the need arises,” he said.
On the devaluation of the yuan, Yeah said it had limited impact on the country’s exports as the ringgit had also depreciated against the yuan.
“As such, it would not affect our export competitiveness,” he said, adding that the Chinese government’s move was merely to tackle the economic slowdown by boosting its exports to achieve a minimum 7% gross domestic product (GDP) growth target for this year.
According to MIDF Research, despite China’s move to devalue its currency by around 2%, it is still relatively stronger compared with most of the other currencies in emerging markets.
“When the yuan last depreciated significantly in mid-January to February this year, it caused a slump in Malaysia’s exports, particularly in the electrical and electronic sector.
“Nevertheless, we believe that any change in economic fundamentals due to the latest action by China should be transitory. We do not think that it will lead to a currency war, as most emerging-market economies are already facing continuous devaluation of their currencies due to the capital outflow towards the US capital market,” MIDF Research added.
On Malaysia’s current account surplus, an economist who declined to be named said it could register a 3.8% growth, based on a full-year GDP growth of 4.7%.
“As such, we must be able to register a growth rate of between 4.5% and 5.5% in every quarter.
“It is also worth to point out that every 0.5-percentage point (ppt) decrease in GDP would translate into a 0.2ppt decline in the current account surplus,” the economist said.
This article first appeared in digitaledge Daily, on August 13, 2015.