economy

Ringgit's historical fall reflects complex economic interplay

KUALA LUMPUR: The ringgit was once on par with regional peers particularly the currencies of Singapore and Brunei.

But its value markedly dropped over the past few decades, reflecting a complex interplay of economic factors. This included price hikes, wage stagnation and shifts in buying power and productivity.

Ringgit History

The local currency was relatively strong, with RM1 equating closely to S$1 and B$1 around 1997. However, since then, the ringgit has depreciated significantly.

As of August this year, RM1 is worth around S$0.30 and B$0.30, indicating a weakening of the currency over the years.

Tradeview Capital fund manager Neoh Jia Man said the main reasons for the ringgit's decline since the removal of the peg to the US dollar in 2005 included a relative decline in national productivity compared to other countries.

He said this had prompted the central bank to adopt a looser monetary policy to maintain export competitiveness and support economic growth.

"A significant drop occurred following the 2014 oil price crash, as Malaysia's economy was heavily dependent on the export of oil and other commodities. Additionally, increasing political instability, which may have been exacerbated by slowing economic growth, eroded investor confidence and reduced capital inflows.

"As a result, the ringgit has weakened relative to major regional currencies such as the Singapore dollar (-31 per cent), Thai baht (-24 per cent), and Philippine peso (-13 per cent)," he said.

Centre for Market Education (CME) chief executive officer Dr. Carmelo Ferlito explained that the decline of the ringgit is a complex issue, noting that a currency's performance is not always tied to real economic factors or the health of the domestic economy.

He explained that external factors like speculation also play a significant role.

"The ringgit versus US dollar had high times between 2009 and 2014, while it started to depreciate faster after 2015. Here probably growing domestic political instability played a role, together with the more aggressive emergence of regional competitors such as Vietnam and Indonesia," he added.

According to economist Dr Geoffrey Williams, in the short-term, the value of the ringgit is determined by market developments and news mostly outside of the control of Malaysian policymakers.

In the medium term, he noted that  policy changes and intervention such as encouraging government-linked investment companies (GLICs) and Malaysian businesses to repatriate profits help to strengthen the ringgit.

He said in the long-term the value of the ringgit reflects underlying fundamentals and investment and growth opportunities.

"These are all relative to other countries. The decline in the ringgit is due to less attractive long-term investment and growth opportunities for both domestic and foreign investors who see better opportunities elsewhere.

"There are many factors to explain this but the core is interventionist and protectionist government policy by previous administrations for many decades. For domestic companies, this restricts their opportunities here so they go overseas. For foreign companies they cannot gain market entry easily so they look for better opportunities elsewhere.

"The details do not matter so much once this basic reality is understood," he told Business Times.

Williams further noted that as the ringgit depreciated, its purchasing power abroad diminished significantly.

He added that domestic purchasing power was protected by subsidies and price controls.

"Productivity is related to the efficiency of businesses and this is in turn driven by the competitiveness of the business environment. Generally, competitiveness is low due to protectionist policy and so productivity has lagged other countries," he said.

Will Ringgit Ever Regain Former Strength?

As Malaysia faces both economic and global challenges, the prospect of the ringgit returning to its previous parity seems increasingly unlikely.

Williams noted that it is less important for the ringgit to match the value of the Singapore dollar. What truly matters, he argued, is the quality of life for Malaysians.

"If the economy is vibrant and inclusive, then incomes should rise and the benefits should be widely shared. This is far more important than the value of the ringgit and represents the primary challenge in the current economic environment," he said.

Meanwhile, Ferlito stated that such comparisons are unrealistic, as they would require disregarding historical events, which he deemed is not possible.

He mentioned that, instead of focusing on regaining past values, the goal should be a more stable currency, similar to its performance in recent months.

"While external factors cannot be controlled, where something can be done is in terms of political stability and - in particular - in terms of business environment and business regulation," he said.

Most Popular
Related Article
Says Stories