The flagging of the ringgit bodes ill for Malaysia’s Anwar

SINGAPORE – Prime Minister Anwar Ibrahim began his tenure with a promise to implement structural reforms and boost investor confidence in Malaysia. But after eight months on the job, the veteran politician is struggling to pull the Southeast Asian country out of a year-long economic funk.

The local stock market saw foreign outflows of 4.19 billion ringgit (US$920 million) in the first half of 2023, with the benchmark gauge among the worst global performers so far this year. The Malaysian ringgit also fell, making it one of the worst performers in Asian currency markets.

On the other hand, Malaysia’s economy grew to market expectations at 5.6% in the first quarter of the year, with approved foreign direct investment (FDI) reported to have increased by 60% year-on-year to 71.4 billion ringgit.

Inflation fell to a one-year low with the consumer price index coming in at 2.8% in May from a year earlier, its slowest monthly pace since 2023.

Still, cost-of-living pressures and political discontent persist, with economic problems and external cyclical factors weighing on the government ahead of state elections in August seen as an early referendum on Anwar’s “unity” government, a multi-party alliance that is unsettled by the grassroots support bases of long-rival political camps.

Malaysia’s Prime Minister Anwar Ibrahim and Deputy Prime Minister Ahmad Zahid Hamidi share a light moment but the currency collapse is no laughing matter. Photo: Twitter

The worrisome performance of the ringgit is an important point of watch as analysts say that unfavorable changes in the exchange rate risk deterring foreign investors due to a lack of confidence in getting profitable returns when the national currency is too weak, raising the cost of repatriating profits back to domestic markets.

The cost of servicing external debt in foreign currencies, especially US dollars, is also rising as the ringgit weakens, squeezing profit margins and exacerbating the credit risks of US dollar-denominated companies. Malaysia has relatively high foreign currency-denominated debt exposure compared to some of its regional peers, with data showing only 33% of total debt denominated in ringgit in 2022.

Anwar’s administration is also battling a fiscal deficit that is among the largest in Southeast Asia and a national debt that has ballooned to 1.5 trillion ringgit ($329 billion), which exceeds 80% of gross domestic product (GDP) when liabilities are included.

In 2018, the then PH-led government said the government’s debt and liabilities exceeded 1 trillion ringgit, higher than previously disclosed by the jailed administration of former premier Najib Razak.

Household debt is also among the highest in the region as a result of Malaysian citizens’ heavy borrowing, accounting for 81% of the country’s nominal GDP in December 2022, compared to a ratio of nearly 89% last year, according to Bank Negara Malaysia (BNM), the central bank. In comparison, household debt to GDP stood at 47% in 2000.

The Malaysian ringgit has fallen about 10.61% against the US dollar since early January, when it traded at 4.24 before falling to a low of 4.69 in late June. As a historical benchmark, the ringgit weakened to 4.88 during the 1997-98 Asian financial crisis and traded at 4.74 before last November’s general election before recovering towards the end of the year.

The national currency has gradually recovered since mid-July, due mainly to cooler US inflation data, and was trading at 4.55, or about 3.41% lower against the dollar in the year to date, at press time.

Analysts are split on whether the ringgit will rise, with some seeing the government’s perceived lack of a clear economic strategy as a key factor.

Carmelo Ferlito, an economist and chief executive officer of the Kuala Lumpur-based think tank Center for Market Education, told the Asia Times that he sees “the lack of a comprehensive economic strategy that would include a primary for market reforms” as a factor behind the depreciation, saying that the authorities are shifting “between pro-market stances and a strong desire to control the economy.”

Ferlito attributed lower-than-expected economic growth in China, Malaysia’s top trading partner, and the continued strength of the US dollar as the “preferred reserve of value in times of uncertainty, despite all the talk about de-dollarization,” as other factors driving the ringgit’s fall while also blaming the Anwar-led government’s failure to address structural economic issues.

“So far, contrasting signals have been sent. The desire to attract FDI is not matched by consistent policies in this direction. Price controls are still in place, labor regulations are still strict, and obtaining a bank account is becoming more complicated. Overall, a comprehensive economic strategy is yet to be seen. The lack of vision will continue to play against the ringgit,” he said.

Malaysia’s economy is losing steam after last year’s post-Covid rebound. Photo: Asia Times Files / AFP / Manan Vatsyayana

While Anwar’s focus for now is on consolidating government finances, plugging leakages and tightening rules for more transparent state procurement contracts, Ferlito said he hopes that after the upcoming state polls, “the government can be bolder in addressing structural issues and start removing price controls, subsidies, red tape and labor restrictions.”

Some observers believe that politics has contributed to the recent weakness of the ringgit, which on July 12 hit a record low of 3.49 against the neighboring national Singapore dollar. The poor performance of the Pakatan Harapan (PH)-led ruling alliance in August state elections, analysts and economists say, could further affect investor sentiment and political stability.

Aside from politics, economic problems are a serious challenge with the ongoing global slowdown severely affecting Malaysia’s export performance, which fell 18.9% year-on-year in June, marking the fourth straight month of contraction. The country is a major exporter of electrical and electronic products, as well as petroleum products, rubber, palm oil and its derivatives.

Past periods of ringgit weakness have generally been a boon for Malaysian exports but slow growth in China and tightening monetary policy in advanced economies have darkened the global trade outlook. BNM forecasts GDP growth of 4% to 5% this year, below the two-decade high of 8.7% seen in 2022 emerging from the Covid-19 pandemic.

The central bank said in late June that it would intervene in the foreign exchange market to stabilize the ringgit, citing what it called “excessive” losses. BNM said the devaluation of the currency did not reflect economic fundamentals and that the value of the ringgit would continue to be set by the market.

Re-pegging the ringgit to the US dollar has also been ruled out, with Malaysia’s Deputy Finance Minister Ahmad Maslan saying last month that doing so would prevent independent monetary policy-making. The government aims to implement structural policies to boost competitiveness and attract foreign investment inflows to support the ringgit, he said.

“The devaluation of the ringgit bodes ill for the economy and even society,” said Mohd Shahidan Shaari, a senior business lecturer at Universiti Malaysia Perlis, in a recent commentary. “Without government intervention to prevent any further decline, one US dollar could be replaced by five ringgit in the future, which could have many adverse effects.

“Therefore, closing the barn door before the horse bolts is very important. One possible step that the government could consider is adjusting the exchange rate. By fixing the exchange rate, the government can stabilize the value of the currency and provide certainty for economic actors, including businesses and investors,” he added.

Malaysia's currency may come under pressure due to higher than previously disclosed public debt and a new expansionary budget.  Image: iStock
Malaysia’s currency is under pressure amid global economic headwinds. Image: iStock

BNM opted to keep its overnight policy rate at 3% earlier this month after it unexpectedly raised rates in May for the fifth time since last year. Analysts see any imminent policy change as unlikely as headline inflation eased in recent months, though some argue that a further decline in the ringgit could prompt BNM to raise rates again.

“Bank Negara may continue to raise interest rates to attract investors to the ringgit. However, as long as rates are raised in the US, Europe and the UK, many investors will not return to the ringgit to help it appreciate,” said Mayra Rodriguez Valladares, a financial risk consultant at MRV Associate and former foreign exchange analyst from the Federal Reserve Bank of New York.

“It is very difficult for a single central bank to influence foreign exchange rates. In fact, no central bank wants to deplete the foreign exchange reserves that defend its currency. The lessons from the Asian financial crisis in 1997 are important to remember,” he told Asia Times. “Central banks cannot fight foreign exchange traders; this is a market of about $8 trillion a day.”

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