Escalating currency war a silver lining for ringgit

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CONCERNS over a weakening ringgit and its impact on the economy have been growing in recent months. However, a silver lining is that the recent rounds of monetary easing by global central banks could give some respite to the sliding local currency.

Since late last year, global financial markets have seen a spate of monetary easing by central banks as part of efforts to spur flailing growth. The Bank of Japan said it was increasing its stimulus programme to fight deflation last October. The People’s Bank of China cut rates in late November amid slowing growth and falling inflation.

This month, the global currency war escalated further with the launch of a massive quantitative easing programme by the European Central Bank while central banks in India, Canada and Denmark, among others, cut rates.  

The latest move was by the Monetary Authority of Singapore, which announced last week that it was slowing the pace of the Singapore dollar’s appreciation against the US dollar. Singapore uses its currency as a monetary policy tool to manage inflation and growth.

Major currencies like the euro and yen have depreciated significantly against the US dollar. Most Asian currencies, too, have depreciated against the greenback but strengthened against the euro and yen by 3% to 12% in the last six months.

The ringgit has been harder hit among regional currencies due to concerns over rising debts and falling government revenue as commodity prices continue to drop. Since last July until Jan 28, the ringgit has lost 11.8% against the US dollar but gained 2.4% against the yen and 5.6% against the euro (see table).

The strengthening US dollar has prompted several central banks in Asia to intervene to prevent their currencies from depreciating too sharply. However, this has taken a toll on their international foreign exchange reserves.

Since last July, China has spent US$150 billion of its reserves to keep the yuan closer to the US dollar, according to DBS Group Research in a report. Singapore, it says, has spent US$30 billion since last July. “In six short months, the equivalent of 10% of a full year’s gross domestic product was spent supporting the currency. Little wonder the authorities eased back on the appreciation slope ... Further easing will be necessary if reserves don’t stop falling.”

It notes that it is not just China and Singapore that are intervening in the markets. “Thailand, Malaysia, Taiwan and the Philippines have all spent the equivalent of 1% to 4% of a year’s GDP over the past six months supporting the exchange rates.”

The question is, for how long can central banks afford to intervene in the markets before their reserves run out?

It is not surprising that central banks are now more tolerant of a weaker currency. Last week, the Bank of New Zealand indicated it will not hike rates any time soon, while there are expectations for the Reserve Bank of Australia to cut rates in the coming weeks.

Focus will be on the US Federal Reserve (Fed) and how it will respond to the currency war. Indeed, it is unlikely that the US will allow the greenback to gain too much ground against the world’s major currencies, as this will hurt its exports at a time when its economy is just beginning to regain growth momentum.

While the prevailing view is that the Fed may raise interest rates a notch by the middle of the year, some economists are more inclined towards the view that US rates may stay put in an environment of low inflation.

If this view gains ground, it is likely that the ringgit’s depreciation against the US dollar may soon find a bottom. A widely held view is that the ringgit should hold around 3.70 to the US dollar.

Already, some economists opine that the US economy is unlikely to outperform this year. At best, they see its GDP growing at around 2.4%. “The US is doing just about what it had done for the past three years — growing at a low 2% pace ... the US is faring relatively better [compared with Europe and Japan], but that’s very old news,” says DBS Group Research.

Hence, in an environment where most currencies are expected to depreciate further against the US dollar, the ringgit’s weakening may not be such a big concern after all. At least for now, until a clearer picture emerges.

It must be noted that the ringgit’s depreciation is not due to a deliberate move by the central bank. Rather, it is a combination of a strengthening US dollar and market concerns about the problems plaguing the domestic economy — rising debts both in the private and public sectors and falling commodity prices.

Given this, there is still an urgent need for policymakers to address these problems to ensure sustainable growth and a stronger currency in the longer term.

The good thing is, the global competitive devaluation has given more room for our policymakers to manoeuvre. For one, there is less urgency for Bank Negara Malaysia to use its foreign exchange reserves to prop up the ringgit. This is more so when Malaysia’s reserves are on a downward trend, having fallen by more than 20% over the last 12 months.

Additionally, Bank Negara can afford to maintain a looser monetary stance to accommodate growth.

Competitive devaluation is a zero-sum game. At the end of the day, the winner will still be the economy with strong fundamentals and good growth.


This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.