Over the past few years, Malaysia’s ringgit has struggled tremendously, sinking to depths not seen since the 1997 Asian Financial Crisis per some reports. Other official statements reveal the currency as Asia’s worst performer in recent times, second only to the Japanese yen.
Such a drastic slide for the ringgit sparks deep concern given the currency’s direct ties to Malaysia’s economy and citizen wellbeing. From everyday household spending to investment returns and beyond, the ringgit’s strength or weakness influences many areas of life.
Yet an air of uncertainty lingers around precisely why the currency has declined so sharply. For reference, in early 2020, $1 USD equaled approximately 4 Malaysian ringgit (MYR). However, at the time of this writing in late 2022, $1 USD trades for 4.7+ MYR, showcasing a steep drop in value.
Delving deeper into history underscores this point further. In 2014, $1 USD converted to just 3 MYR, meaning the currency has depreciated significantly over less than a decade. Benchmarking against Singapore’s currency tells a similar tale – while 1 SGD historically equaled 2.5 MYR, presently it nears a staggering 3.5 MYR. Some project it may one day even exceed 4 MYR per 1 SGD if current trends continue.
Potential Explanations Behind the Ringgit’s Decline
Naturally, Malaysians wonder what factors have catalyzed this currency collapse. Views on the topic vary considerably, with common scapegoats being:
- Political instability
- Global economic trends
- Problems with local economic policies
But do these reasons truly explain the ringgit’s dramatic descent? Let’s explore each one in detail to reach a more informed conclusion.
Political Drama and Corruption Hurt Investor Trust
Firstly, politics undoubtedly influence a nation’s fiscal health. Any time uncertainly or controversy around Malaysia’s government surfaces, the ringgit usually reacts negatively.
While not unique to the country, the regularity of power struggles, scandals, and more makes international investors nervous. And when investment confidence wavers, foreign capital outflows occur, removing support for the domestic currency.
Global Economic Winds Overpowering Malaysia
Secondly, prevailing global economic crosswinds have strengthened the U.S. dollar considerably against nearly all peers. When the dollar strengthens broadly, smaller currencies often weaken as a direct consequence.
In short, the ringgit’s slide partially links to external factors outside Malaysia’s control. But what’s causing the greenback’s meteoric rise in the first place? The answer lies with interest rates.
The U.S. Federal Reserve has aggressively hiked domestic interest rates over the past year. Higher yields attract global capital inflows to American investments. This strengthens the U.S. dollar while draining value from other world currencies.
Now let’s discuss other global dynamics also affecting the ringgit’s value, namely:
- World trade wars
- Fluctuating oil prices
As a major exporter of oil and liquefied natural gas (LNG), Malaysia relies heavily on energy export revenues. Thus, any volatility in global crude benchmarks like Brent or WTI impacts MYR strength.
Similarly, raging trade wars between superpowers like China and the U.S. strain worldwide supply chains. This contributes to reduced global trade flows and economic activity, indirectly depressing currencies like the ringgit.
Shortcomings of Domestic Fiscal Policies
Lastly, issues with local Malaysian economic policies possibly assist the currency’s decline. Two important metrics to assess here include national debt burdens and trade deficits.
Malaysia consistently runs trade deficits by importing more than it exports each year. To pay for these extra imports, Malaysia must purchase foreign currencies. This subsequently dampens demand for the ringgit.
Likewise, towering public debt constrains policy options for supporting MYR strength. With less flexibility to maneuver, Malaysian authorities struggle to implement constructive fiscal reforms.
Thus, the ringgit faces intense pressure from multiple factors – a combustible mix of domestic and external pitfalls. Next, we’ll switch gears to evaluating policy responses for resuscitating the ailing currency.
Government Interventions for Reviving the Ringgit
Malaysia relies heavily on stable currency levels to ensure balanced economic growth. However, actively influencing exchange rates through policy leverages easier said than done.
One direct method for strengthening the ringgit entails hiking domestic interest rates. By raising returns on local assets, higher yields court foreign investment inflows, lifting demand for MYR.
In fact, this exact strategy powered the U.S. dollar significantly higher as noted earlier. Yet Malaysia has hesitated to pursue such aggressive rate hikes witnessed stateside.
True, the central bank has raised benchmark rates from 1.75% in 2021 to over 3% recently. But measured moves pale next to the Federal Reserve’s jumbo increases. Consequently, Malaysia’s modest policy adjustments fail to stem the ringgit’s landslide.
Understandably, authorities also fear drastic rate hikes could derail the nation’s economic engine by making borrowing prohibitively expensive. Slowing activity risks lower tax revenues, unemployment spikes, and recessionary pressures.
Therefore, policymakers must balance currency needs against supporting wider growth. So far, Malaysia has favored gradualism, allowing modest ringgit weakening to cushion growth shocks.
Separately, stimulating exports provides another possible solution. Shipping more goods abroad earns foreign exchange reserves, used to purchase and prop up the local currency.
Direct foreign exchange (forex) market interventions present another avenue for influence. By aggressively selling USD and buying ringgit, Malaysia can engineer a supply-demand imbalance favoring MYR strength.
Alas, substantial currency reserves required to successfully intervene may lie beyond Malaysia’s current means. Plus, effects tend to prove short-lived, requiring ever-larger and more frequent central bank actions.
Given these drawbacks around interventions, could letting the currency depreciate freely serve the nation’s best interests?
The Case for Allowing Further Ringgit Declines
At first glance, the negatives of a fading ringgit clearly outweigh potential benefits, especially for average citizens. But some nuance exists behind that initial assessment.
Undoubtedly, everyday Malaysians suffer from soaring inflation and slowing economic activity. At the same time, however, select industries like manufacturing and tourism could thrive on the currency’s increased competitive advantages.
With Malaysian goods and services more attractively priced for foreign buyers thanks to currency devaluations, export outlooks brighten amid the gloom.
Still, any scattered positives fail to offset the tangible harm citizens experience from higher living costs. Whether at the grocery store, gas pump, or shopping mall, people feel the inflationary sting directly.
Inequalities also surface on a weak currency’s impact across occupations. While exporters and multinational firms may cheer the ringgit’s decline, most salaried employees struggle with depleted purchasing power.
Therefore, equitable and ethical policymaking around MYR stability remains critical for Malaysia’s future. Only by balancing competing interests through transparency and public debate can optimally balanced solutions emerge.
Conclusion
In closing, the ringgit’s gradual decay stems from multiple roots – political turbulence, trade wars, regional competition and more. Reasonable arguments exist to defend currency declines or rally behind appreciation too.
Yet for average Malaysians, a severely weakened ringgit breeds financial hardship via reduced living standards. Thus, the social drawbacks of an excessively fragile MYR must feature prominently in future policy debates.
Engaged public discussions around equitable growth can help achieve this elusive equilibrium where all Malaysia’s citizens benefit over narrowly vested interests. But lasting solutions will take time, collective willingness, and global tailwinds beyond any one party’s control.