Malaysian Ringgit – on the way to RM3.80?
A chart tells a thousand words. The chart below shows the Ringgit-USD trend over the 1 year period and you can see that it has weaken in an almost liner line since August before recorded a recent low of RM3.7215.
Will Ringgit continue to slide to the RM3.80 which is level when it was pegged in 1998? Will any action be taken by BNM to intervene this round if Ringgit were to depreciate to a level deem “too low”? These are the questions which you and I have no answer yet but before that, lets take a look a few matters surrounding the weaker Ringgit.
First, why Ringgit is weakening?
From my reading on a few sources such as Kinibiz, thestar, Bloomberg, the factors contributing to weaker Ringgit are:
- Slump in global crude oil price – It is believed that the slump in crude prices will erode the nation’s revenue as an oil-exporter. The government derives about 31 percent of its income from oil-related sources, official data show. The economic growth is dampened by the reduced in oil revenue.
- The US factor – With the Federal Reserve’s cutbacks of quantitative easing, foreign portfolio investments have seen major outflow back to US. Outflow of Foreign investment will render the nation’s currency to be unattractive due to lower returns.
How does it affect Malaysia?
- Imported goods – prices of imported goods has become more expensive with weaker Ringgit. This translates to lowering of the purchasing power of the nation when acquiring imported goods or when abroad.
- Competitiveness in export market – cheaper currency means that our exports becomes cheaper and more attractive to the international market. The favourable exchange rate can potentially lead to a steady increase in demand for Malaysian exports for the USD denominated markets.
- Tourism – there will be a boost in the tourism industry as now holiday in Malaysia becomes much more affordable to overseas tourists. The increase in spending by tourists will in turn spill over to small local businesses like food and beverages outlets and also manufacturers and shops of locally made products.
- Retail – though it is widely believed that GST will have negative impacts on retail sector, it could possibly be compensated by the weaker Ringgit when more spending will be on local goods, and also the revenue brought in by more tourists to Malaysia.
Well, the above were just some of the possible impacts that are tangible at the moment. In the long run, weaker currency will impact investors confidence, the spending power, and the competitiveness of the country. Also, not to be ignored are the impacts on companies who held USD denominated loans and bonds where it becomes more expensive to serve the interest and loan with weaker Ringgit.
So, will Ringgit continue to fall and hit the level of RM3.80? Most analysts believe that it is a matter of time that it will hit RM3.80 before it is strengthen back. I concur as it is not so much on fundamental of Malaysia, but rather the trend of USD being clinching higher and higher due to positive outlook. In fact, USD went stronger against all major currencies over the past 6 months, though in different margin. So, time will tell if the day will come that Ringgit is back to RM3.80 for 1 USD and it is interesting to see how BNM will react to this.