The Ringgit’s past experiences are more than lessons for its performance potential.
The Malaysian Ringgit is yet in the news again. Chinese stock market turbulence in 2015-16 has been a significant contributor to the Ringgit’s uncertainty in performance. Global drops in oil and gas prices as well as other commodity prices, including rubber and palm oil, have hurt exports. This and more has depreciated the Ringgit, making it fall to its lowest level in 17 years, in August 2015. Some lessons from its past experience and some more plans for future have entailed the economy in a continuous spiral of decisions regarding its currency.
The Malaysian currency’s story dates to 1967, when it replaced the Malaya and British Borneo dollar, facing several challenges since then.
In the mid of 1990s, SE Asia had an investment boom, mostly financed by borrowed money. Since the investments were based on unrealistic projection of future demand, crisis became impendent in 1997. After constant depreciation against other currencies through the period 1997-2005, Bank Negara ended the peg to the US dollar and since then the rise of its value was unavoidable.
However, the problematic situation in the Malaysia in 2008 from political instability, price fall, and the lack of intervention to increase interest rates led to the fall of the Ringgit’s value against the US dollar. Though the global crisis in the same year had not affected the Malaysia directly, the negative effects were felt through lack of FDI and decrease in exports. Consequently, this affected at the fall of the value of the Malaysia currency.
Even greater problems arose in mid-2014 with the affair of Malaysia Development Berhad and transferring of billions of Ringgits to off-shore accounts. With the highest ratio of household debt to GDP in the developing world, stagnant wages, and a falling currency, the country has is facing something akin to a crisis. The existence of a crisis has been evident from a high inflation and low purchasing power; this, in the extant flat public consumption scenario, which is further assisting in decreased production and currency depreciation.
The latest problem is that foreign investors use liquid NDF markets in Singapore and Hong Kong to protect themselves from restrictions in the domestic market. This is seen as potentially destructive in companies’ ability to hedge foreign-exchange flows; this would finally affect exports, economic growth and external balances. Weakening of the Ringgit is the most possible outcome. In a prodigal step taken by Bank Negara, foreign investors were asked to use the central bank’s officially quoted onshore rates instead of the offshore rates from the non-deliverable forwards markets.
Still, there seems to be no respite. The Ringgit recorded a sudden drop when Trump was elected for the President of the United States becoming the weakest currency in Asia. It is expected that an even greater fall in the currency would come by, due to foreign selling of local equities.
As a contemporary, emerging economy, Malaysia has made great strides from being underdeveloped country. One essential catalyst in its success has been a growing manufacturing sector. The Ringgit, in the process, has passed through many changes, and witnessed some trying times due to economically-political decisions and circumstances. Considering the extant uncertain global environment and some major consequences of the three crises that Malaysia experienced, it is time the economy takes hold of the reigns. Malaysia has a lot to learn from its affairs. Development and steps towards becoming more than the hub of tourism must now become priority. It would be a shame to stop here.