30-10-2023 (KUALA LUMPUR) The Malaysian ringgit is plummeting, raising concerns about mounting economic challenges and rekindling unsettling memories of past currency crises. As the beleaguered currency sinks to its lowest levels against the US dollar in 25 years, policymakers are facing increasing pressure to act swiftly in order to restore confidence and manage the inflationary consequences. With the adoption of prudent fiscal policies, pro-growth reforms, and effective central bank stewardship, Malaysia may successfully navigate the choppy waters that lie ahead.
The sharp decline in the ringgit’s value can be attributed to the US dollar’s surge, driven by the Federal Reserve’s aggressive tightening measures and growing demand for safe-haven assets in the face of global uncertainty. As capital flees from emerging markets towards US assets, Malaysia finds itself suffering from collateral damage. The ringgit recently breached the psychologically significant 4.8 barrier, approaching levels last seen during the 1998 Asian Financial Crisis.
While the currency’s decline is primarily driven by external forces beyond Malaysia’s control, it poses a significant threat of importing higher inflation. As the ringgit continues to depreciate, the prices of imported goods, such as essential food staples, are surging, placing considerable pressure on households and businesses alike. In just one month, the cost of onions has nearly doubled, exerting substantial strain on restaurateurs and retailers. Unless policymakers take decisive action, the repercussions of this inflation may become unbearable for citizens and could potentially trigger broader economic impacts.
Given Malaysia’s heavy reliance on imports, a weaker ringgit jeopardizes living standards and consumption. The depreciation of the currency raises concerns that it could lead to broader price increases. The diminishing purchasing power of citizens may deter both consumer spending and business investments, which could potentially slow down the overall economic recovery.
Simultaneously, the weakened ringgit complicates Malaysia’s growth prospects by enhancing the competitiveness of its exports on the global stage. However, external demand, including that from major trade partners like China, remains muted, limiting the potential gains from increased exports. With the electronics sector encountering headwinds, the ringgit’s depreciation may not be sufficient to offset the rising costs of imports.
On the whole, currency depreciation presents a complex policy challenge. While the drop in the ringgit’s value benefits certain industries, it predominantly affects households by driving up the costs of imports and causing inflation. Additionally, potential offsets, such as increased tourism receipts, remain uncertain.
Malaysia’s policymakers must address this challenge decisively to maintain economic and financial stability. Despite the central bank’s assertion that the economy is not in crisis, citizens are growing increasingly concerned as they witness the ringgit’s decline. Bold measures are urgently required to prevent the genuine onset of crisis conditions.
Fiscal policy must assume a central role in alleviating the financial strain on Malaysians. Expanding subsidies through cash handouts can help offset the rising cost of living, particularly for lower-income groups. In cases where broad subsidies are untargeted and costly, direct financial aid provides relief where it is needed most.
The recent budget’s focus on fiscal consolidation may need to give way to stimulus measures, especially when recession risks are on the rise. With the welfare of the people at stake, budget discipline can take a back seat for more auspicious times. The Finance Ministry should be prepared to implement aggressive spending measures if conditions significantly deteriorate.
Nonetheless, it is essential to exercise caution and avoid excessive subsidy expansion, which could burden public finances and distort incentives. Assistance, such as subsidies and cash handouts, should be temporary and not permanent entitlements. The objective is to alleviate the hardships faced by citizens during periods of volatility without engaging in fiscal extravagance.
As the prices of imports, exports, and consumer goods fluctuate due to currency movements, the central bank should reinforce its commitment to subduing inflationary expectations. Consumers who anticipate sustained price increases may alter their behavior in ways that become self-fulfilling, potentially setting off an inflationary spiral. Preventing this scenario is of utmost importance.
The central bank deserves commendation for refraining from aggressive interest rate hikes, as such measures would likely attract speculative capital flows without effectively addressing currency depreciation. Interest rates are influenced by global factors, and their impact on exchange rates is limited. However, effective domestic inflation control remains crucial, regardless of currency fluctuations.
While capital controls, such as offshore trading bans, should be avoided due to their potential to distort the market, Bank Negara should remain prepared to adjust macroprudential tools, such as loan-to-value limits, should the property sector overheat due to investors seeking refuge in hard assets. These targeted measures can help prevent the formation of asset bubbles and excessive risk-taking.
Beyond immediate crisis management, Malaysia must reinforce its fundamentals to ensure long-term resilience against external shocks. The adoption of structural reforms is imperative to create a more competitive and productive economy. This includes streamlining regulations, upgrading skills and infrastructure, dismantling patronage networks, and upholding principles of good governance, all of which will enhance investor confidence over time.
The adjustment in exchange rates also presents an opportunity for Malaysia to shift its growth model towards higher value-added, innovative industries, and increased self-reliance. This strategy can reduce the nation’s dependence on imports, create high-quality job opportunities, and shield the economy from the volatility of global conditions. However, achieving this goal will require increased investments in technology and human capital development.
