The outlook for the Malaysian ringgit remains cloudy after being on the backfoot for most of this year, experts say, weighed down by political uncertainty, falling exports, China’s sluggish economy, the strong dollar and corporate demand for foreign currency.
The ringgit traded at 4.24 against the dollar in early February but had fallen to about 4.67 on Friday, meaning the Malaysian currency has decreased about 9.2% in value. As a historical benchmark, the ringgit weakened to 4.88 during the Asian financial crisis a quarter century ago.
And while bouts of ringgit weakness in recent years are not unknown, experts have voiced concern about the present fall, though the government says it has no intention of radically revamping policies to address it.
Ahmad Maslan, the first deputy finance minister, said in parliament this week that authorities are not planning to peg the ringgit to the dollar as that would effectively rob Malaysia of the ability to pursue independent monetary policy.
The currency’s woes this time come as Malaysia gears up for six crucial state elections, widely seen as a bellwether of the popularity of Prime Minister Anwar Ibrahim’s coalition government — launched in November and which includes Pakatan Harapan (PH) and Barisan Nasional (BN).
The country’s Star newspaper reported this month that the local elections are likely to be held in August, though there is speculation they could come as early as next month.
“The first concern is political stability,” Rais Hussin, president and CEO of Emir Research, told Nikkei Asia. “Anxieties over the durability of the unity government, which will be subject to further stress in the run-up to the coming state elections, will affect investor sentiment … and hence the [weak] ringgit,”
Rais warned of potential “huge capital outflow that will put [more] downward pressure on the ringgit” if PH and BN underperform in the three key states of Selangor, Penang and Negeri Sembilan.
The opposition Perikatan Nasional (PN) coalition alleges the government is not fighting hard enough for Malay rights and Islam in the ethnically diverse Muslim-majority country despite Malay Muslims forming over half the cabinet.
Vehicles destined for export to Malaysia are seen at a port in China’s Jiangsu province last year. The two countries have developed close trade relations. © AP
Economic performance has also been working against the ringgit. Despite a moderately strong first quarter — with GDP growth of 5.6% and easing inflation — a recent sharp fall in exports is casting a shadow, said Yeah Kim Leng, an economics professor at Sunway University and a member of Anwar’s financial advisory committee.
Malaysia’s exports — which include electronics, petroleum products and palm oil — declined a whopping 17.4% in April from the same month in 2022, worsening from a 1.4% year-on-year drop in March.
Yeah said that under normal circumstances a weaker ringgit could boost export competitiveness, but this time “the decline in global demand negates the weak currency’s edge.”
The ringgit’s outlook is also shaped by expectations for China’s growth and the underperformance of the yuan. The latter may have accentuated the ringgit’s sharper-than-expected decline, Yeah said.
Since 2009, China has been Malaysia’s biggest trade partner, with bilateral exchange last year reaching $203.6 billion, according to the Bernama news agency. In May, Chinese customs data showed that the country’s exports fell far faster than expected, dropping 7.5% from the same month last year, Reuters reported.
“The strong relationship with China is now finally emerging for what it is and should always have been considered: a liability,” said Carmelo Ferlito, CEO of Kuala Lumpur-based think tank Center for Market Education.
Higher demand for foreign currency deposits is also playing a role as they are almost 9.5% of system deposits, or some 47 billion ringgit ($10.2 billion) higher than two years ago, said Pankaj Kumar, managing director of Kuala Lumpur-based Datametrics Research and Information Centre (DARE).
The nonfinancial corporate sector is reported to have external borrowings of 14.4% of gross domestic product, of which 11.1% were dollar-denominated in 2020.
The strengthening dollar will result in higher debt-servicing with ringgit earnings, thereby compressing profit margins and exacerbating credit risks for U.S. dollar-leveraged entities.
“The weak ringgit may also cause flight of capital as individuals or businesses look elsewhere to protect wealth and purchasing power,” said Pankaj. He added there is a need for pro-business government policies that encourages foreign investment that will increase the demand for ringgit.
The Ministry of Finance said this week it remains committed to implementing measures to increase growth and competitiveness to bring in foreign investment and fund inflows to bolster the currency.
Experts are largely sanguine, however, over perils for the companies themselves and see the debt situation as manageable on a systemic basis.
“I believe most of the large Malaysian corporates had learnt the 1997-98 lesson to ensure foreign currency debt is only taken to support foreign business [as a] natural hedge, and if they are exposed, most of them can rely on currency hedging tools to limit exposure,” Pankaj said, referring to the Asian financial crisis.
And some are optimistic on the political front as well.
“The unity government under Anwar is strong,” said Mohd Azizuddin Mohd Sani, a professor of politics and international relations at Universiti Utara Malaysia. “Support for him is growing. Seeing people spending well in the shopping complex tells me that our economy is in good shape.”
And DARE’s Pankaj said it is only a matter of time until the U.S. Federal Reserve begins to cut interest rates, likely resulting in a weaker dollar that could pave the way for the ringgit to rebound.
“The biggest concern is how long will the [ringgit’s] weakness persist,” he said, adding that the longer it lasts, the greater the danger to the economy — mainly due to imported inflation.
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