NOT many Malaysians know this but the downside of a strong currency is that it can exert a significant drag on the economy over the long term as entire industries will be rendered non-competitive and thousands of jobs lost.
While some might prefer a strong currency, a weak currency can result in more economic benefits.
There is a common fallacy about exchange rates that say a “stronger” or “appreciating” currency must be better than a weaker or depreciating currency. However, “strong” is not necessarily better than “weak”.
Even in military terms, a “strong” army need not necessarily be invincible or be a strong fighting force – just look at the recent counter-offensives by the “weak” army of Ukraine, which caused the “stronger” Russian army to withdraw from Kharkiv helter-skelter.
But do not let this confuse you. Stronger currencies are not necessarily better; it’s just a different ballgame.
Consider, for example, the impact of a stronger ringgit on six different groups of economic actors: Malaysian exporters selling abroad; foreign exporters (firms selling imports in the Malaysian economy); Malaysian tourists who are abroad; foreign tourists visiting Malaysia; Malaysian investors considering opportunities in other countries; and foreign investors considering opportunities in the Malaysian economy.
The following figure captures their reactions towards a stronger ringgit and a weaker ringgit respectively:
Let’s analyse first the case of a stronger ringgit.
Malaysian exporter (sad emoticon): A stronger ringgit is a bane for a Malaysian exporter. When the exporter earns foreign currencies via export sales and then converts them back to ringgit to pay workers, suppliers and investors, the stronger ringgit means that the weaker foreign currency buys fewer ringgits and the firm’s profits (as measured in ringgit) fall.
As a result, the firm may choose to reduce its exports or it may raise its selling price, which will also tend to reduce its exports.
In this way, a stronger currency reduces a country’s exports.
Foreign exporter (smiley emoticon): For a foreign firm exporting to Malaysia, a stronger ringgit is a boon. Each ringgit earned through export sales, when traded back into the domestic currency of the exporting firm, will now buy more of the domestic currency.
As a result, the stronger ringgit means the firm will earn higher profits than expected. It will then seek to expand its sales in Malaysia, or it may reduce prices, which will also lead to expanded sales.
Consequently, a stronger ringgit means consumers will purchase more from foreign producers, expanding the country’s level of imports.
Malaysian tourist (smiley): For a Malaysian tourist abroad exchanging ringgit for the relevant foreign currency, a stronger ringgit is a benefit. He receives more foreign currency for each ringgit, and thus the cost of the trip in ringgit is lower.
When the ringgit is strong, it is a jolly good time for Malaysians to tour abroad.
Foreign visitors (sad): A relatively stronger ringgit means their own currencies are relatively weaker, and as they convert their own currency to ringgit, they have fewer ringgits than previously.
When the ringgit is strong, it is not an especially good time for foreign tourists to visit Malaysia.
Overseas Malaysian investor (sad): A stronger ringgit is a curse for a Malaysian investor who has already invested money in another country as he must first convert his ringgits to a foreign currency for investment in the foreign country, and then later convert that foreign currency back to ringgit.
If, in the meantime, the ringgit becomes stronger, then when the investor converts back to ringgit, the rate of return on that investment will be less than originally expected at the time it was made.
Foreign investor in Malaysia (smiley): A stronger ringgit is a blessing for a foreign investor putting money into a Malaysian investment as it will boost the returns of the said foreign investor as he converts from his domestic currency to ringgits for investment in Malaysia, while later planning to switch back to his domestic currency.
If, in the meantime, the ringgit grows stronger, then when the time comes to convert from ringgit back to the foreign currency, the investor will receive more foreign currency than expected at the time the original investment was made.
For all these cases of a stronger ringgit, the reverse holds true for a weaker ringgit.
What all this means is for a given stronger/weaker ringgit, three groups of economic actors experience bliss while another three experience misery and all the groups that enjoy bliss with a regime of weaker ringgit will experience misery with a stronger ringgit and vice-versa with the other three groups in the case of a stronger ringgit.
“Barking up at the wrong tree”
So, from the above explanation, the politicians who accused the Government of not knowing what to do to “strengthen” the ringgit are barking up at the wrong tree.
If the Government listens to them, then what will happen is the stronger ringgit will change position – the smiley economic actors will become miserable and the miserable will become the smiley emoticons (refer to the figure above).
The Government correctly sees the weakening ringgit as a non-issue as it will not lead Malaysia to an economic crisis, as Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz put it.
It is fashionable nowadays in this era of financial crises to see one country’s currency stronger and this has become somewhat populist, especially at a time of election fever.
If these politicians come into power with their own idea of a stronger ringgit while remaining disconnected from the real issue of a weaker ringgit vis-a-vis a stronger ringgit, the country will go down the drain.
In economics, as opposed to the depreciation of the currency, we’ve got to be very careful when there is a sudden 20% decline in the ringgit because that will be as good as a devaluation of the currency which could lead to imported inflation for countries that are substantial importers.
Another thing the politicians clamouring for a stronger ringgit got wrong is the slant of the story on the weaker ringgit. It is not that the ringgit is weakening against all other currencies, but rather mainly with the US dollar, the reserve currency of the world.
And the US, like its allies in the EU, is in a Catch-22 situation. The massive sanctions they imposed on Russia not only hurt Russia but backfired on them as well in the form of an unprecedented spike in energy and food prices that is causing galloping inflation that has not been seen in many years.
This high inflation can only be tamed with higher interest rates and the US Federal Reserve is very focused on sticking to aggressive rate hikes as inflation stays hot.
The Fed is expected to deliver a third straight 75-basis point interest rate hike this week, if not more, after a US Government report showed that consumer prices did not ease as expected in August and price pressures appeared to broaden.
With aggressive rate hikes, the US dollar is bound to appreciate again against all currencies in the coming days and weeks (although the US is aware such aggressive policies could result in the country going through a recession, which will be contagious in spreading to other parts of the world).
But this is another Catch-22 story that will unfold much later.
Even so, it would be interesting to watch when the US stops these aggressive rate hikes in order to prevent a recession.
“The slant of the story”
We can clearly see how the angle or slant of the story as the ringgit weakens against the US dollar is the story of almost all major currencies undergoing depreciation against the US dollar, including the mighty Euro, the currency of the EU countries.
And thus the right question to ask would be: is Malaysia the worst affected country in terms of currency depreciation against the US dollar?
As pointed out by Tengku Zafrul, while the ringgit has depreciated by 7.5% against the greenback since the beginning of 2022, many currencies in the region and developed countries as well have also fallen against the greenback.
Malaysia is actually doing well in comparison to Japan, the UK and the EU, as the slide in ringgit is the lowest compared to the slides in the currencies of these three countries.
Also, the ringgit has strengthened against the currencies of Malaysia’s other trading partners such as Japan, the UK, the EU, New Zealand and South Korea.
Additionally, economic fundamentals that have continued to strengthen are important in determining the robustness of the ringgit.
These include gross domestic product (GDP) growth on the rise for every quarter beginning with the last quarter of 2021, the unemployment rate of 3.7% in July 2022 being the lowest since the COVID-19 pandemic hit the country, the robust rise in the Industrial Production Index, the wholesale and retail trade and export figures.
The country’s inflation rate is also manageable at 2.8% for the first seven months of 2022 due to price control measures, particularly through the provision of subsidies of almost RM80 bil this year.
What was the reaction of these politicians who seemed to be “paralysed” by a weakened ringgit to Tengku Zafrul’s statement?
Contemptuously accusing him of downplaying the ringgit’s slide and warning him of a downtrend against the greenback would affect Malaysians as it would see an increase in the cost of imported food (as if Tengku Zafrul is too naive not to know this).
The problem of the rising costs of imported food predates the current slide in the ringgit. In fact, the general problem of the rising cost of living is a perennial problem.
Even economists interviewed by Malaysiakini said the ringgit slide effect on daily life is minimal (although it is best to cut spending all the same). – Sept 20, 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