Ringgit depreciation – How should we respond?

Of late there has been a lot of concern about the drop in the value of the Ringgit vis-a-vis the US dollar especially after it dipped below RM 4.80 to the dollar, a level last seen in in January 1998. The fact that the Singapore dollar has appreciated to RM 3.56 adds salt to injury!

Understandably, many look to the Madani Government to do something about the problem and several have taken to castigating the Prime Minister. But, in this matter, I do not think a major misstep by our PM or the Madani government is the cause of the Ringgit’s current woes. Let me explain a little.

The exchange value of most currencies is determined by the supply and demand for the currency in the international financial markets. If, for example, there are many countries wanting to buy a particular Malaysian product, then there would be an increase in demand for the ringgit in the international financial markets – because the buyers would convert their currency to the Malaysian ringgit to buy the product, or the Malaysian sellers of the products would convert the foreign currency that they received upon selling the product, back to ringgit. Either way the demand for the ringgit will go up and this will lead to a strengthening of the ringgit against other currencies.

There are approximately RM 2000 billion worth of bonds in the Malaysian bond markets, if we take both Government bonds and private sector bonds into consideration. Around 25% of these bond holders are non-Malaysian institutions. If a portion of the holders of Malaysian bonds decide to sell their Malaysian bonds because they can get higher returns from US Treasury bonds, which have benefitted from the marked increase in US benchmark interest rates in the past year, then the supply of the Ringgit in the international financial markets would increase, and that will tend to a depreciation of its value.

The following economic activities tend to increase demand for the ringgit in the financial markets and thus strengthen the ringgit – the exports of goods and services, repatriation of profits earned overseas by Malaysian corporations, inflow of foreign direct investment, purchase of Malaysian bonds and shares by foreign parties and repatriation of earnings by individuals working overseas.

The activities that will tend to increase the supply of the Ringgit in the financial markets include imports, repatriation of profits out of Malaysia by foreign investors, repatriation of wages by the 5 million strong migrant worker community, withdrawal of portfolio investment from the Malaysian bond and equity markets, transfers to Malaysians studying abroad, Malaysian companies and institutions investing abroad, transfer of funds derived from corruption and the shadow economy to offshore tax havens, and royalty payments (for the use of patented technology) to sources outside Malaysia. This set of activities will tend to depress the exchange rate of the Ringgit with other currencies.

The rules and regulations for all the economic activities listed in the above two paragraphs have evolved over the past 30 years under the tutelage of the Bretton Wood institutions – the World Bank, the International Monetary Fund and the World Trade Organisation. These institutions have preached that the more open one’s economy is, the less barriers there are to trade and to capital flows, the better it is for the long-term growth of the country. According to these experts, Malaysia needs to demonstrate that we are “business friendly” to be able to attract investments and grow the economy. Our policy makers have lapped up this advice, and over the past 30 years, signed away much of our economic sovereignty in a series of “Free Trade Agreements” (which cover many matters other than trade per se). As a result, we are now in a hyper-liberalized situation where the whims and fancies of the investing class creates a casino-like atmosphere in our capital markets and leads to large capital flows in and out of the country, causing fluctuations in our currency. This is why I said I find it difficult to blame the Madani government and PMX for the ongoing slide in the ringgit. It is the consequence of over-liberalization that has taken place over the past 30 years, with the acquiescence of most Malaysians (apart from the small groups that have lobbied against the US-FTA, the TPPA and the CPTPP!)

The current crisis affecting the Ringgit is due primarily to the much higher base interest rate in the US (5.25% cf our 3%) as well as the muted growth of the global economy. The Ukraine War with its sanctions and the “friendly fire” damage of the Nord Stream pipeline have tipped Germany, the largest economy in the EU, into a recession. China’s economy is struggling with the problems of overproduction and lack lustre growth of aggregate demand (a common malady that afflicts capitalist economies). Poor growth statistics globally translate into poorer export performance for many countries, and this is particularly dire for Malaysia, as we are an export dependent economy – the value of our exports is about 70% of the value of our GDP.  

So, what should the Madani Government do?

We definitely should not use our countries foreign reserves to try and mop up the ringgit in the financial markets in an attempt to shore up its exchange value vis-a-vis other currencies. That would be a recipe for disaster, as it would motivate currency speculators to “bet” against the ringgit. These creeps will short sell the ringgit because they think it is trading above its true value and that they will be able make a tidy profit by buying ringgit at a value lower than their selling price. Their efforts will markedly increase the supply of the ringgit in the financial markets and cause a run on the ringgit, depressing its value even further.

We could increase our base interest rate – the OPR or Overnight Policy Rate – which is now 3%. This would help to reduce or perhaps even reverse the out-flow of Portfolio capital. However, the downside of this would be an elevation of the effective interest rate on housing and car loans taken by our population. Household debt in Malaysia is in the region of 75% of GDP. The interest due on this debt will increase when the OPR goes up. In addition, increased borrowing costs for businesses might dampen economic activity, investments and thus job creation. Thus, we need to evaluate the pros and cons of such an action.

The depreciation of the ringgit is not entirely a bad thing for our economy. It will make our exports more competitive in foreign markets and this might increase sales, and promote expansion of production of these export products, thus increasing jobs, overtime and incomes of Malaysians. Production costs will also be cheaper for foreign firms and this might induce more direct foreign investment in Malaysia and this again will create jobs.

However, there are serious negative impacts of the depreciating ringgit on our people that have to be addressed. And the Madani government should take these negative impacts seriously. A major effect is imported inflation. Almost 50% of the food we consume is imported. About a third of the rice we eat is imported! (How silly!) In the short run, the government should consider additional regular cash transfers to B40 families (on top of the STR payments) to cover the rising costs of food and other essential items.

In the longer run, we should aim to increase our self-sufficiency to 100% for rice over the next 5 years. We cannot merely pin our hopes on increasing padi yield (though we should attempt it). We also need to increase the area under rice cultivation from its current 0.7 mil hectares to about 1 mil hectares. We need to bear in mind that out of the 8.4 million hectares of agricultural land in Malaysia, about 6 million hectares are planted with palm oil. All large plantation companies should be given mandatory rice production quotas that they have to meet within 3 years. If they fail to do so, the government should acquire a small portion of their land and start Felda type rice production schemes on them.

We also need to look into other food products – vegetables, fish, fresh milk, fruits – that are now being threatened by the “development” of housing, industrial schemes and land reclamation projects, and take firm steps to stop the under-mining of our food producing capacity. If we have sufficient domestic sources of alternative food products, our people will not be so badly affected by imported inflation in the future.

The Madani Government should also look into the economic problems of families of students studying abroad. The depreciation of the ringgit might have put them into financial distress. It would be good if the government could offer loans with low interest rates to these families to help them meet the expenses of their children overseas. Similarly, there would be quite a number of SMEs which have cash flow problems exacerbated by the depreciating ringgit and sluggish market demand, especially if they have external creditors. A cheap credit scheme would be hugely helpful for these cash strapped firms and should be implemented soon to prevent the closure of these firms and the ensuing loss of jobs.       

The Madani government also need to cut itself loose from the ideological constraints put on Malaysia economists and policy makers by learned consultants from the West . We need to step back and review our economic strategies. The relevant questions that we need to ask ourselves include

  • Does free trade supersede every other economic objective? Including food and energy security? And development of domestic manufacturing and technological capacity?
  • Shouldn’t we work with willing partners in ASEAN to promote an indigenous pharmaceutical and vaccine production capacity in ASEAN? This too might require the use of tariffs to develop this capacity.
  • Should certain barriers – capital controls (an extremely bad word according to Bretton Wood institutions) – be put up to discourage foot-free portfolio capital that flit in and out of our capital markets without any concern for its impact on our currency and the cost of living of our people? We certainly should welcome foreign investors who are committed to partner with us in developing the economic pie in Malaysia. And we should allow them to repatriate their share of profits. But what about the casino types whose actions can disrupt our economy?      

It is also high time we ask ourselves whose interests the well-dressed (and highly “educated”) men from the World Bank and other such institutions actually represent. The ordinary people of both the advanced countries and the emerging economies (China being the exception) have suffered under the onslaught of their neoliberal policy prescriptions over the past 25 years. The 500 largest corporations and billionaires of the world are the ones who have benefited immensely form the hyper-liberalized international economy that they have promoted.

High time for a review of our economic strategy don’t you think?

Jeyakumar Devaraj
Parti Sosialis Malaysia


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