THE Centre for Market Education (CME) has identified both external and internal factors that contributed to the weakness of the ringgit in recent times.
Chief among the reasons is the resilience of the US economy and the pivotal role of the greenback in a climate of world uncertainty.
“The US dollar remains the preferred reserve currency in delicate moments like the present one – and despite all the re-current discussions about de-dollarisation – a credible alternative has yet to emerge,” opined CME’s CEO Dr Carmelo Ferlito.
Other contributing factors include:
- The US Federal Reserve rate policy and the increased spread between US and Malaysia;
- Weak China performances: Although Bank Negara Malaysia (BNM) labels these performances as “weaker-than-expected”, CME believe that they had to be expected at the light of the long suicidal lockdown policy.
The strong link of Malaysia with China is now weighing negatively on Malaysia. The effect is stronger on Malaysia due to the small domestic market.
- General climate of geopolitical uncertainty: This does not only involve China but also the Middle East with the subsequent uncertainty on key commodities such as oil and gas (O&G) which are very important for the Malaysian economy.
Recall that the ringgit fell to its lowest level since the 1997/1998 Asian Financial Crisis last week as the local currency was weighed down by the nation’s widening rate differential with the US.
It dropped as much as 0.5% to RM4.7703/US$ – the weakest level since 1998 – which also makes it the worst performer in Asia this year after the yen. The situation is now not improving in a sensible way.
Domestically, CME reckoned that the most important factor is “the abundance of conflicting messages from the policy perspective”.
“We get commitment to fiscal discipline and yet the biggest budget ever. Price controls were removed only recently despite statements in favour of a pro-investment eco-system. Ekonomi Madani seems to be open to the market economy while the 12th Malaysia Plan (12MP) mid-term revision hinted at a heavier role for the government,” observed Ferlito.
“The scenario described so far makes it difficult to identify a policy plan: monetary policy is unlikely to have any sensible effect while at the same time, the Malaysian government cannot solve global economic conflicts.”
Nevertheless, the Malaysian government can support the local currency by improving the policy framework and the strategy on international trade, according to Ferlito. In this regard, CME recommended the following course of action:
- Speeding up on the idea of more bilateral free trade agreements as envisaged by the Ekonomi Madani framework: Malaysia desperately needs to move beyond China from an international trade perspective by building stronger relations within ASEAN as a starting point.
- Speeding up on the re-building of the manufacturing base as hinted by the NIMP2030 (New Industrial Master Plan 2030) so that Malaysia can diversify its export policy not only geographically but also in terms of higher value-added locally made products.
- Improve the consistency of the policy strategy, committing the country to attract foreign investments and to build the right ecosystem for nurturing domestic entrepreneurship and favour industrial concentration in order to spur technical progress. – Oct 25, 2023
