Misgivings over prolonged ringgit weakness

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THE ringgit appears to be stuck in a prolonged period of weakness against a number of key currencies.

This weakness was apparent even prior to the scenario when interest rate hikes by the Federal Reserve became the reason for strengthening of the US dollar against most other currencies.

The US dollar may be an exceptional comparison due to its status as the safe-haven currency of the world, another reason why it continues to see gains against many key currencies.

However, the ringgit had also weakened in the past ten years against the Thai baht and the Singapore dollar in the region and main trading partner the Chinese yuan.

The ringgit has also weakened against other Asean countries including the Vietnamese dong and the Philippine peso in the last ten years, although at a smaller quantum.

Against other currencies such as India’s rupee, Japanese yen and the Indonesian rupiah, the ringgit did not show any meaningful appreciation or depreciation.

It had also weakened against the British pound and the euro in the last ten years.

Economists say a weaker currency may be a disadvantage on some fronts but there are some advantages as well.

Advanced countries such as the US have sometimes cited that a currency that is too strong can hinder export competitiveness.

Sunway University professor of economics Dr Yeah Kim Leng points out that relying solely on a weak currency for export competitiveness is not a sound strategy as other areas of the economy are impacted.

“Export competitiveness based on an undervalued currency is not sustainable as the latter penalises imports especially capital good and technology imports. The longer term consequences are stagnation in industrial upgrading and resource misallocation especially if the export earnings and surpluses are channelled into unproductive or wasteful investments,” Yeah tells StarBizWeek.

“Overvalued currencies that lead to overspending, high foreign borrowings and loss of international cost competitiveness are equally harmful. The sustainable optimal currency value over time is one that strengthens in line with the country’s growth and productivity increases,” Yeah adds.

In the short term Yeah notes that currency movements are necessary and act like a “shock absorber”.

He says currency movements should be left flexible to allow it to adjust according to the prevailing economic and financial conditions.

“A weaker ringgit also means Malaysian exports are cheaper to foreign buyers, thereby boosting the country’s export competitiveness. Foreign visitors and investors will have greater purchasing power when spending or investing in the country, raising the country’s attractiveness temporarily,” Yeah notes.

Socio Economic Research Centre executive director Lee Heng Guie says a weaker currency will be a positive for export-oriented industries and palm oil on higher currency translation gains.

“It is however negative for industries depending on high import content but sell locally, as their margins will be squeezed. Their overall cost of production will also be affected by the exchange rate and also inputs used in the production of final goods and services,” Lee tells StarBizWeek.

Machinery that is required by manufacturing companies would usually need to be imported. In the healthcare space, advanced imaging or individual patient medical devices are usually imported from the west.

According to healthcare players, the cost of these machines have gone up of late and it has indirectly led to higher healthcare costs in the country.

Lee says a weaker currency also impacts companies when workers compare their salary to what other countries with stronger currencies may be offering them.

Meanwhile, Yeah says a weak ringgit means more expensive imports and this effect can be felt immediately by the people given the ease through eCommerce transactions on the Internet these days.

“Malaysians will have lower purchasing power when buying foreign goods or assets (services). A bigger budget is also needed to travel or study abroad. Additionally, businesses and individuals who borrow in foreign currency will also face higher debt servicing costs when the ringgit is weak,” Yeah says.

He notes that the ringgit’s weakness against the US dollar may reverse as the US economy encounters headwinds in tackling high inflation amidst its banking crisis, monetary over-tightening and excessive government and private sector debt levels.

“Volatility in the global and regional currency and financial markets is expected to ratchet up sharply this year,” Yeah says.

Yeah also notes of the ringgit’s underlying economic fundamentals such as moderately strong growth, low inflation, adequate foreign reserves, positive current account surplus and strong banking system that remains favourable.

“These have helped to maintain a relatively stable level against a basket of currencies of the country’s trading partners,” Yeah says.

“But the improving political stability and the government’s strong commitment to address institutional weaknesses and strengthen administrative governance and integrity, we should see the ‘political risk premium’ contributing to the persistent ringgit weakness being reduced,” Yeah adds.

The gradual restoration of public and investor confidence will also reverse the negative perceptions towards the economy and its currency, he says.