ONE year
ago, on Aug 21, the US dollar was worth RM3.17. At the time of writing, the
selling rate was RM4.11. The loss of almost 30 per cent in value of the
currency is simply massive and causing nightmares for all who buy products or
services in hard currencies.
Exporters whose prices are cheaper may not fare much better as they are forced
to contend with slower global demand. Add to this the prospect that the weaker
currency will also push up production costs and fuel inflation.
So
what accounts for the ringgit’s precipitous drop?
Like most things in life, the ringgit is determined
by a combination of factors, rather than one or a few acting in a direction. It
is not just about fundamentals but also perception. And it is not just about
perception but also fundamentals.
FIRST, and
indisputably, the greenback is appreciating against most currencies and not the
ringgit alone. This is on the back of a recovering US economy and an impending
hike in US interest rates, originally anticipated in September but now being
questioned.
Last month, the International Monetary Fund scaled back its
US economic forecast from 3.1 per cent to 2.5 per cent for 2015 as the result
of an unexpected output slump and declining labour productivity. The sharp decline
in the Chinese yuan this month adds further uncertainty by slowing US exports.
SECOND,
commodity prices, notably oil and gas prices, have fallen, as a direct result
of the strong US dollar and, concurrently, concerns about world economic growth
and demand. With commodity price forecasts pointing downwards, the demand for
the currencies of commodity producers like Malaysia have declined.
THIRD, the
move to a more market-based pricing of the yuan on Aug 11 was mistakenly taken
as a signal that China’s slowdown was greater than anticipated. There was a
flurry of panicky currency trading as currencies, including the ringgit, sought
to realign themselves and this tipped the US dollar over the RM4 mark.
FOURTH, despite
unexpectedly strong second quarter aggregates, the Malaysian economy is clearly
slowing. Higher public sector consumption and induced infrastructure spending
helped offset the decline in net trade contribution to growth.
Elsewhere though, private investment is declining as a
result of lower external demand, domestic credit and fiscal tightening, while
private consumption shows signs of easing.
FIFTH, the
ringgit’s weakness has been driven by portfolio investment outflows, both
foreign and domestic. Changes in ringgit bank deposits by companies and
households started to fall from early 2014 and have done so more sharply of
late, even as foreign currency deposits have increased.
How much of this is due to increased domestic political
developments is a matter of opinion, and there are many. It should be noted
that the size of the ringgit market is not particularly large, and driven
primarily by trade and investment. Despite what is sometimes reported in the
media, the ability to accumulate large short (or long) positions, i.e.
speculation, is no simple matter.
On the plus side, there were signs earlier this year that
even in the midst of a declining ringgit, there was still investor confidence
in Malaysia. In March, Petronas managed to sell US$5 billion of bonds at finely
priced rates and it was reported that demand exceeded supply.
On the downside, the cost of insuring Malaysian bonds
against default has been rising. In mid-August, credit default swaps (CDS)
increased 44 basis points over the period of just three weeks. In contrast, CDS
prices of comparable countries have not moved as much.
If one needs further evidence that the ringgit value
responds to domestic developments, in June this year, there was selling on
expectations that a major credit rating agency would downgrade Malaysia’s
sovereign rating. This did not happen and the currency rebounded.
The idea that the ringgit is dictated entirely by external
forces and is insulated against domestic political developments is therefore as
erroneous as the opposite.
The government’s defence that the currency is “undervalued”
is as much a matter of opinion as is those who attribute it entirely to the
political scandals wracking the country.
A weaker ringgit can absorb the shock of external deflation
and help the economy to bounce back or it can be a catalyst of a crisis and
symptom of investment confidence. Global factors certainly affect the value of
the ringgit but only quality governance can determine which of these outcomes
becomes a reality.
The writer is deputy chief executive of the Institute of Strategic and
International Studies (ISIS) Malaysia.
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