THE weaker ringgit has caused three groups of actors in the economy to suffer – the foreign firms exporting to Malaysia, Malaysian tourists abroad and foreign investors in Malaysia. Their sufferings need to be addressed.
On the other hand, with a weaker ringgit, we leave three other groups alone in their bliss – the Malaysian exporters, foreign tourists in Malaysia and Malaysian investors abroad.
This approach is better than the opposition’s call for the Government to tinker with the exchange rate to make the ringgit stronger, which is a zero-sum game as it will transform the misery of the sufferers into a state of bliss at the expense of those who are already in a blissful state with a weaker ringgit.
Let’s now focus on how the sufferings of the foreign firms exporting to Malaysia can be mitigated – including their agents and distributors in Malaysia (i.e. the local importers who also suffer).
The Malaysian authorities could negotiate with them to diversify their exports to Malaysia by increasing the imports of goods/services that are crucial to Malaysia at competitive prices.
For example, while Malaysia is waiting for self-sufficiency in producing animal feeds, see if the foreign firms exporting animal feeds to Malaysia can diversify their product.
Ditto with the import of food and agricultural products at competitive prices that will enhance food security and the import of raw materials for the manufacturing of high technology products.
Since exports will flourish in a weaker ringgit environment, those local importers dealing with raw materials and products that are not crucial to Malaysia (eg. luxury goods/services) should be encouraged and incentivised to become exporters of any goods/services that Malaysia’s trading partners need most.
“Mimic overseas resorts”
As for the suffering of Malaysian tourists abroad, this can be mitigated with the development of local tourist resorts that mimic overseas resorts such as skiing resorts with artificial snow.
With such resort facilities, Malaysians then don’t have to go for a hefty holiday experience abroad skiing in the snowy resort of Switzerland, the Italian Alps and Dolomites for the perfect mountain vacation with a weaker ringgit; they can travel to these expensive holiday spots when the ringgit is stronger.
Having holiday resorts that are adapted to the western environment will signal more western tourists to come to Malaysia for a longer period for another purpose – saving hefty energy bills at home by leaving home for a relatively longer period of vacation overseas at a time when energy prices are skyrocketing in the US and European Union (EU).
With that, the Malaysian tourism authorities could conduct a campaign to woo people in Japan, US and the EU to stay in Malaysia as tourists for longer periods of time to avoid paying hefty energy and food bills.
Also, Malaysian investors abroad who are in a blissful state with a weaker ringgit, can diversify their investment in holiday resorts overseas and then give Malaysian tourists abroad a hefty discount to these places at a time when the ringgit is weaker.
The misery of the last sufferer of a weaker ringgit – the foreign investor in Malaysia – can be mitigated by giving them a hefty incentive to invest in the high technology sector of Malaysia.
Thus, a situation of a weaker ringgit is an opportunity to restructure the economy for high technology and self-sufficient economy.
The case of Singapore with its stronger currency is a good inspiration to learn how to avoid the pitfalls of a stronger currency.
Let’s go back in time
In the 1960s and 1970s, Singapore was the only industrial-based country in the region, surrounded by the agricultural and commodities-based economy of its neighbours.
With its entrepot trade advantage still intact since colonial time, it went on an industrialisation spree by welcoming multinational companies (MNCs) to set base on its shores (which was not fashionable at that time as most Asian countries resorted to import substitution to industrialise their economies).
Furthermore, the newly independent Asian countries calling the foreign MNCs to operate in their countries smacked of neo-colonialism.
Apparently, Singapore’s approach was the better one and the country progressed with a relatively not-so-strong but stable currency, on the back of an industrialisation process that was very much labour-intensive.
When other countries copied the Singapore model initially, this led to a stronger Singapore dollar because it still had the edge in attracting established MNCs.
However, we know from economics that if a strong currency is maintained, it will lead to an erosion of export competitiveness in the long run , thus damaging export-dependent industries which can exert a significant drag on the economy over the long term as entire industries are rendered non-competitive and thousands of jobs are lost.
This scenario, however, did not happen to Singapore as its leaders then had the foresight to restructure its economy to move up the value-added chain from a labour-intensive industrial economy to a capital-intensive one during the 1980s and 1990s.
The good thing about this strategy is Singapore never saw its neighbours moving towards a labour-intensive industry as a competitor but instead as complementing the city-state’s move to a capital-intensive industrial nation.
It never resorted to beggar-thy-neighbour policies. The idea behind such policies is the protection of the domestic economy by reducing imports and increasing exports – usually achieved by encouraging consumption of domestic goods over imports using protectionist policies – such as import tariffs or quotas to limit the number of imports.
It relocated its labour-intensive industries to neighbouring countries and helped them in setting up industrial parks, and its successful ambition made the country a vibrant international financial hub.
With this restructuring of the economy, the Singapore dollar maintained its strong standing not only in comparison with the currencies of neighbouring countries but also with many currencies of the world.
And when the neighbouring countries decided to move up the ladder in the value-added chain by doing what Singapore has done in moving to a capital-intensive industrial country, the republic once again restructured its economy into a high-technology one, thereby maintaining its strong currency without affecting its export competitiveness.
It achieved this high-technology economy by making it a knowledge-based one.
As neighbouring countries yet again move towards a high-technology economy, Singapore is restructuring its economy to a service-oriented one.
Another factor that accounts for a strong Singapore dollar is that the republic has chosen the exchange rate (rather than interest rates) as the principal tool of monetary policy. This is predicated on its small size and high degree of openness to trade and capital flows.
A basic philosophy underlying Singapore’s exchange rate policy is to preserve the purchasing power of the Singapore dollar in order to maintain confidence in the currency and preserve the value of workers’ savings.
Just as some of Singapore’s particular characteristics necessitate a unique monetary policy framework, there are several structural factors that have allowed the exchange rate to function effectively as an intermediate target of monetary policy.
First, the country’s high savings rates in the public sector due to the Government’s budgetary surpluses, along with the contribution of companies and households to the mandatory Central Provident Fund (CPF), have led to the continual withdrawal of liquidity from the banking system.
The Monetary Authority of Singapore (MAS) accordingly injects liquidity into the market by selling Singapore dollars and buying US dollars to offset Government and CPF flows.
Secondly, MAS has gained credibility through its pre-emptive and effective policy decisions by its single-mindedness and discipline in focusing on medium-term inflation trends, coupled with its robust reserves. These have earned the trust of the market and the public.
It adopts a medium- to long-term orientation in formulating monetary policy, anticipating a six- to nine-month lag between implementation and impact, which has helped in reducing the volatility of the exchange rate, anchoring the economy and providing certainty for businesses and households.
The effectiveness of Singapore’s exchange rate policy is due to the broader framework that its monetary policy is part of.
Monetary policy does not work in a vacuum. Instead, it is situated within a wider framework of sound and consistent policies, including flexible prices and wages, a deep and efficient financial market, a robust corporate sector and prudent fiscal policy.
The close coordination between fiscal and monetary policies has successfully ensured macroeconomic stability in the past decades, including meeting the challenges of past and recent financial crises.
“Why a stronger currency is not necessarily better”
Singapore also provides a reason why having a stronger currency is not necessarily better.
The MAS has reported a net loss of S$7.4 bil in the financial year ended March 31, 2022. Additionally, Singapore’s official foreign reserves (OFR) also recorded a net loss of S$4.7 bil for the same financial year.
The MAS OFR is held in foreign currencies, and according to MAS, three-quarters of the OFR is held in USD, euro, yen and pound, with the majority being held in USD.
A CNA report back in July said the Singapore dollar is performing well against the euro and pound, and that it is at an all-time high against the yen.
The appreciation of its currency means the republic got lesser Singapore dollars when translating (converting) the foreign currency into the local currency. This is the main reason why the OFR saw a net loss of S$4.7 bil despite making a profit of S$4 bil in foreign investments.
In turn, this is the reason MAS would not be contributing to Singapore’s Consolidated Fund this year. However, it is considered a short-term loss.
This is the first time it has not contributed in two years as MAS had contributed S$2.17 bil in the 2019/20 financial year (FY) and S$1.07 bil in FY 2020/21.
The Consolidated Fund is just like a bank account held by the Singapore Government, of which revenues are channeled towards and out of which Government expenditures are spent.
In years of net profits, the contribution for each financial year will be paid over a period of three years to ensure the stability of the Government’s budget.
Even though MAS will not be contributing to the Consolidated Fund, the Government will still receive S$1.1 bil due to the previous years’ profits.
Your editor is not trying to say that Singapore’s policy of maintaining a strong currency is a bad one; overall, this policy has brought tremendous benefits to the country.
It is how the negative effect of a stronger/weaker currency is mitigated that matters and according to many analysts, with a strong reserve to begin with, built up through the years, Singaporeans would not be affected that much by the loss of its OFR due to a stronger currency.
As I mentioned earlier, a stronger or weaker currency is a different ballgame, and neither is intrinsically good or bad. – Sept 24, 2022
Jamari Mohtar is the editor of Let’s Talk!, an e-newsletter on current affairs.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Main photo credit: Bloomberg