The Malaysian ringgit has taken a battering over the last few months, especially relative to some of the high performing currencies in the region, like the Thai baht. The Malaysian ringgit is now at a nine-year low against the US dollar, just recently ducking under the psychological RM3.80 mark.
This new ringgit low has come at a time when a number of potential scandals such as the 1Malaysia Development Berhad (1MDB) furore, where the Sarawak Report and Wall Street Journal (WSJ) has alleged that Prime Minister Najib Tun Abdul Razak received $700 million into his personal bank accounts, are threatening Government.
These accusations are part of an all out brawl going on between former Prime Minister Tun Mahathir and the current prime minister for power and control of the dominant governing party UMNO, something that has been common in Malaysian politics. As such, it is not the underlying reason why the ringgit is so low at the moment, contrary to what most pundits are saying.
Beyond these psychological factors that many see as destabilizing the currency are fundamentals within the Malaysian economy that are behind the fall.
As we have seen, global oil prices have been falling since the 3rd quarter of 2014. Oil and gas represents 30 percent of the Malaysian Governments revenue, and 20 percent of the country’s exports. In addition palm oil and rubber prices are low, where demand for rubber has weakened through a slowdown in China growth.
Malaysia is thus in the grips of a fall in export growth (20.2 percent in April and 15.6 percent in May 2015). Where household debt is currently 88 percent of GDP, and government spending is being curtailed, contractions in the economy are to be expected. This can be seen in the decline of imports in May by 16.0 percent, and a weaker-than-forecast production output last month. The decline in exports is forecast to continue over the rest of the year.
Due to the background environment of the Greek debt crisis, debt laden state investment in Malaysia doesn’t look too good to ratings agencies at the moment. This is probably the most important factor working against the ringgit at present, and there doesn’t seem to be a short term solution.
Many pundits forecast doom and gloom, even talking about re-pegging the ringgit against the US dollar, and re-introducing exchange controls, like then Prime Minister Tun Mahathir did during the Asian Financial Crisis back in 1997, at RM3.0 to the US dollar.
However, today’s situation is very different from the Asian Financial Crisis. There are seemingly not the same levels of speculation that were present back in Mahathir’s time, so any pegging of the ringgit to the US dollar would probably just bring unnecessary panic, and may even incite much more capital flight.
There is no evidence that the banking sector is in danger of collapsing, and the fundamentals of Bursa Malaysia appear sound.
Some of the trouble is also external and beyond the control of Bank Negara and the Malaysian Government, with the U.S. Federal Reserve bank lifting interest rates at present.
As such, the ringgit appears to be undervalued at present, which may not be a bad thing. An undervalued RMB helped China to become the factory of the world.
The low ringgit is signaling that the Malaysian economy is too narrow and dependent on commodities such as oil and gas, palm oil, rubber, electronic goods, etc. Much more diversity is needed.
There is no doubt that the Malaysian Government is trying to manage its budget. However, relying on the windfall of GST payments which will start to come in next month will not be enough. The Government will have to cut spending drastically, but luckily there is room to do that without hurting services to the people. It will just take the will to look hard at much of the wasted spending that is going on within the Government service today.
The low ringgit provides an enormous opportunity to revitalize the Malaysian economy.
First the Government needs to look hard at import replacement, and, second, develop new innovative goods and services for export.
Agriculture and small scale manufacturing are almost stagnant at present and require a much needed shot in the arm. There are many products that can be produced that can reduce demand for imports and be exported. Local resources are available, and only need to be deployed in aid of revitalizing agricultural production. New sources of innovation and skills are needed in the SME sector to transform it into a major pillar of the Malaysian economy.
When these new products filter through, the impact of inflation from the lower ringgit and introduction of the GST can be lessened dramatically.
Revitalizing agriculture and small scale manufacturing are the best tools to fight inflation and unemployment, which will be two major issues for the Government to face later in the year.
If this can be quickly tackled through raising levels of local enterprise and innovation, more employment can be created and the impacts of imported inflation minimized.
This may be best achieved through abandoning the current approach to economic management at the aggregate level and start looking at Malaysia as a series of smaller regional economies. One policy solution doesn’t fit all and different stimulus initiatives are required in different places.
New paradigms are needed, where the ‘top down’ development approaches, could be replaced with ‘participatory’ approaches where real commitment can be developed at the grassroots level. Lack of commitment by infrastructure policy implementers has been a factor of failure for a long time in Malaysia. Instead of looking at biotechnology hubs, and Multi-Media corridors, look at what small scale appropriate technologies can do for the economy.
This is a big dream, but Malaysia needs a big dream to reposition the economy through much needed emphasis on diversity.
The low ringgit provides this opportunity.