Business

Wednesday October 21, 2009

Are we better off with a stronger ringgit?

By IZWAN IDRIS


Weak currency will have negative impact on investors’ confidence

MY parents live down south in Johor Baru, a short drive away from the Causeway that links Malaysia and Singapore.

The narrow Tebrau Straits separates the two nations but, for Malaysians, the general feeling is that the economic gap between the two countries had widened a bit more in Singapore’s favour in the past years.

“If you look at the exchange rate, it is rising in Singapore’s favour,’’ according to Wan Suhaimie Saidi, an economist at Kenanga Investment.

Bloomberg’s data showed the ringgit had declined 1.6% against the Singapore dollar over the past one year, and was down 7% over a four-year period that started from July 2005. The ringgit was officially de-pegged against the US dollar from a fixed rate of 3.80 on July 21, 2005 and, like the Singapore dollar, is currently under a float system tied to a basket of currencies.

Economists estimate that the United States accounts for about 20% of Malaysia’s total trade, but as much of 80% of the country’s foreign transactions are denominated in US dollar.

One theory why the ringgit is limping behind its regional peers is that the ringgit basket is US dollar-heavy.

This explains why the currency continues to track the US dollar movement closely under the current “managed float” system, rather than reflecting Malaysia’s own economic health.

Typically, a weak ringgit, in a way, works as a subsidy for local exporters by way of keeping export prices “competitive” against manufacturers based in other countries. This strategy helps local manufacturers earn more ringgit for every dollar sold but, on the flip side, Malaysians will have to pay more in ringgit for imported goods and services.

As US dollar-denominated prices of commodities from crude oil to sugar continue to rise on the greenback weakness, the increase in prices will eventually make its way into the local economy.

But, as it stands now, the tame inflation allows Bank Negara to maintain a loose monetary policy and, with this, most analysts expect the Overnight Policy Rates to remain at the current 2% to support domestic growth.

Malaysia’s economy contracted 6.2% in the first quarter, but the decline narrowed to 3.9% in the second quarter. Official figures for the third quarter may show some improvement while most pundits expect the economy to be back on the growth track for the final quarter.

The US dollar had fallen 15% against a basket of six major currencies since March, based on the performance of the US dollar index traded in New York. During this period, the won shot up 34% against the US dollar, followed by the rupiah’s 27% appreciation over the same period. The rupee gained 12%, while the Singapore dollar strengthened by 11%.

The ringgit lagged behind with a 10% rise, which was slightly better than the baht’s 9% advance.

Malaysian Institute of Economic Research executive director Datuk Dr Mohamed Ariff Abdul Kareem was quoted recently as saying that the ringgit was projected to trade at 3.30 against the US dollar next year, and might strengthen to 3.00 by 2012.

Most analysts expect the ringgit to closely track the US dollar movement for the rest of the year.

At near-0% interest, the US dollar is a cheap currency to borrow, but yields almost nothing to keep. Savvy international investors lend money in the United States and use the cash to buy assets elsewhere.

“The dollar’s recent decline reflects greatly-reduced risk aversion, and rising commodity prices also are a sign of investors’ increased appetite for risk amid hopes for global recovery,” Morgan Stanley Research said in a recent report.

Analysts said US rates were not likely to be raised anytime soon, as the world’s biggest economy is still in recession and struggling with high unemployment.

CIMB Research noted that the US dollar did not strengthen during the recoveries that followed the last two recessions. This was due to the initial sluggish nature of those upturn that prevented the US Federal Reserves from tightening its monetary policy.

To capitalise on the dollar decline and the prospect of global recovery, investors had shifted their cash holdings into other assets that yielded higher returns.

Commodities and Asian equities are the big winners. Gold, which is the traditional hedge, is now trading at record high of US$1,065 an ounce.

Indonesian stocks have the highest return in US dollar terms year-to-date. The Jakarta Composite Index rose 84% in its local currency, but shot up 122% if the gains are reflected in US dollar.

At 1,265 points yesterday, the FBM KL Composite’s 48% rise year-to-date was the least among other regional stock indices.

In terms of monetary policy, Bank Negara has no set target for the ringgit. Its primary, most visible weapon to fight inflation and stimulate growth is by managing interest rate. As an open economy, the central bank’s key focus is price stability and the ringgit’s recent movement reflected this.

In the short term, economists said the prospect of a stronger currency would only fuel speculative investment. Frothy equity markets around the region may attest to this.

“But the ringgit cannot afford to be seen as lagging behind other regional currencies for long, because this will have negative impact on investors’ confidence,’’ Inter-Pacific Securities head of research Anthony Dass told StarBiz yesterday.

It goes without saying, at least for those living in Johor Baru, that a stronger ringgit will also be positive to national pride.

The Government, under Prime Minister Datuk Seri Najib Tun Razak, has set its sight to move up the value chain from a middle-class status to a high-income nation.

High income equals to high purchasing power. To achieve this, it will require shifting the whole economy away from its current low-cost manufacturing base to a more service-oriented one, which is more or less what Singaporeans had done.

This means attracting the best talents to work in new industries.

Some said “ringgit weakness” in recent times had also contributed to the so-called brain drain issue that plagues the country.

Deputy Finance Minister Datuk Awang Adek Hussin remarked recently that better pay elsewhere, including in Singapore, made it a difficult task – and an expensive one too – for the Government to lure overseas Malaysians to return home to work.

Keeping the ringgit undervalue against its regional counterpart may be counter-productive in the longer run, as it will only fuel our addiction to cheap exports industries that only attract unskilled foreign labour.


For Bank Negara statements click here


Latest business news from AP-Wire

  • E-mail this story
  • Print this story