KUALA LUMPUR, May 15 – The Malaysian ringgit is catching up with the US dollar as growing global interest in the greenback dramatically boosts its demand and value.
The sharp rise in the US dollar has caused the ringgit to depreciate 5.3% year-to-date (YTD) to RM4.3987 against the US dollar on Friday from RM4.1763 on January 1, 2022 and is expected further decline following the US Federal Reserve’s decision to raise interest rates.
The decline in the value of the ringgit against the US dollar has set off alarm bells among economists, forcing governments to find ways to stabilize the local note’s exchange rate.
What the government faced today is similar to what it faced during the 1998 Asian Financial Crisis (AFC) and the 2008 Global Financial Crisis (GFC), which saw the ringgit suffer a sharp decline against the greenback.
The value of the ringgit was RM3.80 and RM3.46 respectively against the US dollar before measures were taken to stabilize the local rating.
The striking difference was that the price of oil saw a slump in late 1998 and 2008, where its average price was US$12.76 per barrel and US$96.94 per barrel respectively, compared to around US$106.61 the barrel today.
Therefore, why is our local currency depreciating against the dollar while oil prices are trading higher than before?
The answer is that not only is the ringgit facing pressure, but the currencies of developed countries are facing it as well.
According to the Chief Economist of Bank Islam, Dr. Mohd Afzanizam Abdul Rashid, various reasons influence the movement of a currency, especially in terms of demand.
He said it could be short-term or structural in nature, like something more permanent.
The economist said short-term factors could take the form of, among other things, interest rate decisions by major central banks such as the US Federal Reserve (Fed) as well as other factors such as geopolitics. like the war in Ukraine.
“During this time of uncertainty, the demand for the safe haven currency, namely the US dollar, would be higher because the currency is deemed stable and liquid. This will happen all the time,” he said.
Besides the ringgit, he said the Singaporean dollar also weakened by 3.42% against the US dollar, the Thai baht depreciated by 4.52%, the Indonesian rupiah fell by 2.39% , the Taiwanese dollar was down 7.15% and the Japanese yen was down 10.7% against the US dollar. greenback since the beginning of the year.
What could be done to minimize the impact?
Among the measures taken to mitigate the 1998 AFC were the peg of the ringgit to the US dollar as well as the closure of foreign trade in the ringgit and trade in Malaysian stocks in Singapore to end speculative activities in the currency. and in the local market.
The measures also aimed to regulate capital flows, especially short-term capital outflows from foreigners and local citizens.
During the 2008 GFC, the government implemented fiscal and monetary policy, stabilizing the banking system and strengthening the economic outlook to stabilize the ringgit.
As a result, the banking system had sufficient capital to resolve the crisis and it was relatively difficult for the Malaysian authorities to borrow from foreign banks.
Malaysia has also adopted measures to deal with the crisis in the form of a fiscal stimulus package and an easing of monetary policy.
However, Mohd Afzanizam said the steps taken in 1999 and 2008 were not the best steps that could be replicated to address today’s growing concern.
“We have to understand that the effect of currency movement is always two-way. This can be a costly affair for importers as they have to pay more, but exporters benefit as export prices become very affordable from the point of view. of the foreign buyer.
“I guess the government should focus on managing the economy ensuring that growth stays intact and can help the business community to thrive and more quality, well-paying jobs will be created along the way. “, did he declare.
He said that by doing so, the local currency would align with the state of the economy and its outlook.
In addition to this, Mohd Afzanizam said another crucial aspect is the subsidy to the people to mitigate rising inflation as well as the prices of basic necessities.
“We recognize that there are cases of misused subsidies, but the reform must be stopped at this stage to prevent the situation from getting worse.
“What we need is a roadmap and direct communications with businesses to ensure that people don’t have to carry this burden on their shoulders,” he said.
Light at the end of the day
Either way, rest assured that what the country is facing today has been encountered before and the administration will take the necessary steps to mitigate the impact on the people.
These would include the tightening of monetary policy by Bank Negara Malaysia announced on Thursday and an increase in the minimum wage to RM1,500 from May 1, 2022.
Looking at the first quarter 2020 (Q1 2022) GDP announcement on Friday, which was higher than expected due to growth in domestic demand, namely consumption and investment, there are signs that the local economy is improving after the pandemic.
The continued reopening of the economy has been instrumental in contributing to the national economy, as many households and businesses transact, which could be accretive to GDP.
As the economy improves, more jobs are created, the supply chain returns to normal, investment returns, and monetary and fiscal measures are taken, Malaysia will regain its footing and the ringgit will stabilize. — Bernama