Written by: Averroes
(1.0) Introduction
After the separation of Singapore from Malaysia, their Lion City's currency has come at the highest exchange rate when converted into the Malaysian Ringgit. According to the Channel News Asia (CNA), the Singaporean dollar topped at RM3.1964, which is the record high.
What is more befuddling is that, in December 2014, the Malaysian Ringgit to US Dollar was only RM3.4455. However, in August 2015, the Ringgit fell to RM4.2615, the lowest in 17 years after the decline of commodity price and uncertainties of China's economy.
The depreciation can be explained for the 41.1% one year from the end of August 2014 was because of crude oil prices began to fall. With the American US monetary policy conversion, Malaysia's debt debacle and the political scandal of 1MDB, it contributed pressure to the Ringgit depreciation. There were more capital outflows and deficits.
Now, the World Bank (2017), places that the Malaysian exchange rate to the the American dollar is RM4.148. The Malaysian Ringgit is undervalued. Though, in the long-term, the situation may become better.
One reason: which may explain this reason is that, Harvey mentioned that the American President, Joe Biden decided to mull cutting tariffs onto Chinese goods. This inadvertently boosted the Chinese Yuan to its highest degree. This then caused a ripple effect, which then improved the standing of the Singaporean dollar, since the Yuan had the largest share in Singapore's S$NEER basket.
Second reason: is that Singapore has a idiosyncratic monetary policy as compared to Malaysia's, when it comes to their Central Bank. Their currency appreciated due to more formidable policy maneuvers.
The main indignation here is that, while Singapore's exchange rate is higher to Malaysia, there may be its pros and cons. The Pros is that, more Singaporeans are coming to Malaysia for tourism and spending into our country. More investors may be interested to settle in Malaysia, due to its cheaper alternative.
Though, the drawbacks is that, if we reverse that scenario, our people would have to pay extra as compared to what a normal Singaporean would pay for a bottle of Coke for instances. There would be higher 'brain-drain' into Singapore
(2.0) The Economy of Malaysia
Since Malaysia's independence, it has a track record of being one of the best economies in Asia, with an average GDP of 6.5% per annum for almost 50 years. Our economy is driven by natural resources, the expansion of the science, tourism, commerce and medical tourism.
Malaysia is a newly industrialised market economy, ranked third largest in Southeast Asia and 29th largest in the world (Kiran, Zaeema, Faiza and Farrukh, 2017). The Malaysian economy is among the most competitive, ranked 6th in Asia, higher than Australia, France and South Korea between 2014-2015.
According to a HSBC Report, Malaysia is expected to the world's 21st largest economy by 2050, with a GDP of $1.2 trillion and a GDP per capita of $21,247. Electronic equipments, petroleum and liquified gas producer forms a contingency that an increment of income per capita would transpire.
With rapid development, it would improve the Malaysian population's life expectancy, higher literacy and above average fertility. Malaysia also attracts many Foreign Direct Investment (FDI) and lowered poverty lines to 0.6% in 2014. Though, Malaysia is within the middle income trap (Kumagai, 2018).
Malaysia being a member of the Association of Southeast Asian Nations (ASEAN) formed in 1967 ameliorated Malaysia's international trade and the rest of world, while simultaneously invigorating high transaction of foreign currency.
(3.0) The Malaysian Ringgit and its History
In the past, our Malaysian Ringgit (MYR or RM) was known as the Malaysian Dollar (M$). On June 1967, there were 3 separate dollars including the M$, which are the old Sterling-linked Malaysian/Straits Dollar. The unit of M$ was created.
The Central Bank of Malaysia, or Bank Negara Malaysia administered exchange controls under the Malaysian government, by delegating authority to authorised banks. By its inception, the M$ was pegged to the Pound Sterling in 1971, with a fixed rate at 7.4369 M$/₤.
As the Sterling Area diminished, Malaysia adopted the U.S Dollar as the intervention currency, replacing the Pound Sterling in June 1972. The Effective Rate was established with a fluctuation range. Since then on June 1973, Malaysia positioned the Effective Rate for the dollar on a controlled and floating basis.
In 1975, the Effective Rate was abolished, and substituted in terms of basket of representative major currencies, weighed on basis of major currencies of settlement and with countries of Malaysia's major trading partners.
In August 1975, the M$ was renamed to the current RM. The same exchange rate maintained until the Asian Financial Crisis in 1997, that has ramped up currency declines throughout Southeast Asia, causing deflated import revenues, stock market slumps and governmental upheavals (Wilson, 2017).
Before the Crisis, the exchange rate was 1USD to RM2.42, but it depreciated to 1USD to RM4.88 on 7th January 1998 by 50%. Soon, the Malaysian Ringgit follows a fixed exchange rate system, pegged to the US Dollar at RM3.80 per USD $1 on 2nd September 1998, and not based on demand and supply.
When the Global Economic Crisis or Subprime Crisis 2008-09, Malaysian banks were not that impacted, with the collective exposure of Malaysian banks to the sub-prime mortgage-backed Collateralised Debt Obligations. Though, the manufacturing and export sectors were impacted by the global recession.
Fiat money, that sources from market forces of supply and demand, but not linked to physical reserves (Carducci, 2013). It is merely used as a medium of payment. This would then expose vulnerability of exchanger rates to new symptoms and effects related to financial markets, due to global risks and volatilities. The Malaysian Ringgit is considered to be Fiat Moeney.
For four decades, Malaysia adopted multiple exchange rate regimes, including the Bretton Wood System, Managed Floating, Free Floating and Currency-Floating. The government would always intervene, especially when it involves the said regimes.
On 21st July, 2005, Bank Negara announced to to emulate China announcing to have a managed float system against the USD. This allows the Ringgit to operate under a managed float system against several basket of major currencies and trading partners, returning the original exchange rate system before the fixed exchange rate in 1997-98.
At this juncture, it can be said that neither the Ringgit or Chinese Yuan experienced major fluctuations, as the fixed exchange rate system was successful (Nakamura and Umezaki 2006).
However, the general instability of scores of factors, especially under macroeconomics have contributed to the volatility of the Ringgit. Alagided and Ibrahim (2016), defines volatility as the continuous fluctuations of exchange rates.
According to the Organisation for Economic Co-operation and Development (OECD) in 2013, the Interim Economic Assessment predicted that, (especially for Malaysia's condition), emerging economies would endure an era of capital outflows and currency depreciation, because of turmoil within global financial markets.
(4.0) Exchange Rate and its Market
Nature of Exchange Rates: Exchange Rates is indeed of paramount importance when it delves into international trade transactions and investment (Dooidge, Griffin and Williamson, 2006). On the other hand, a Foreign Exchange Market is a globally decentralised made up of supply and demand currencies (Ickers, 2006; Sharma and Rai, 2014).
The Foreign Exchange Market operates 24/7 which is the largest ever financial market in the world (Eun and Resnick, 2014). It accelerates the transfer of purchasing power, finances international trade and extenuates foreign exchange risks.
First and foremost, it is imperative to define and categories aspects of exchange rates;
An Exchange Rate is where the price of a currency goes against another currency. There are two different types of quotation.
Direct Quote: is where the domestic currency per unit of a foreign currency
Indirect Quote: is where foreign currency is per unit of domestic currency
(5.0) Detrimental effects of further depreciation
Since Malaysia is a developing State, our economies are susceptible to financial and currency crises, including its impacts. More encumbrances would surface, in efforts to mitigate exchange rate risks and improve economic growth (Wandeda, 2014).
Some of the effects of Exchange Rates fluctuations may influence or constitutes matters of imports, exports, employment growth, inflation, investment, economic activity and growth. For unemployment, when it increases, then foreign exchange would also increase (Choi, 2018).
Foreign exchange means, more people want to buy our RM our its demand has increased. For example, Venkatesan and Pnnamma (2017), found that under macroeconomic factors, higher inflation would affect foreign exchange rates. When inflation occurs, the value of the currency declines.
For imports, Malaysia lacks in self-sufficiency as we rely too much on imported goods, despite our currency depreciation in 2014. We still import rice, garlic, onions, chilies and tomatoes (Kankyakumari, 2017). These large imports are because of our inferior quality designs in contrast to foreign brands.
However, Malaysia does rival at the top for exporting manufactured foods, from electrical machinery and equipment, however, the components for them are still highly imported (Workman, 2018a). There are studies that shown that if macroeconomic factors such as GDP becomes lower, the exchange rate would be lower (Mirchandani, 2013).
When there is volatility, it debilitates exporters and weakens their activities, as prices or shift of resources of supply and demand diverts to reduce exposure of exchange rate risks. However, Foreign Direct Investments are not affected by the fluctuations or volatility, but instead trade openness, market size and inflation rate (Xin, Thye, Chun, Yoke and Chun, 2012).
When there is depreciation in the Ringgit, it causes reduced economic growth. Therefore, the Malaysian Government acknowledges that exchange rate is one of the obstacles to obtain a competitive, robust, dynamic and resilient economy in line with Vision 2020 (Mohamad, 1999) and remains so until today.
(6.0) What Malaysia has done
In 2009, Malaysia embarked upon the Economic Stimulus Package and the Economic Transformation Programme, 2010 for improved market productivity to enable more jobs under the National Key Economic Areas. As a result, the electronics and electrical products sector saw a growth of 15.6% while the service and finance sector saw a growth of 6.8% and 6.1% respectively.
During the Asian Financial Crisis 1997-1998, unlike Thailand, Indonesia and South Korea, Malaysia did not resort to receive support from the International Monetary Fund (IMF). Tun Dr. Mahahtir as he was Prime Minister then reshuffled the cabinet in 1984 and appointed Daim Zainuddin as the Minister of Finance.
Privatization guidelines were introduced in 1985 to advance fiscal consolidation as to advance toward high economic growth, with the mid-1990s seeing a surplus. During the COVID-19 Pandemic, the Malaysian government has introduced several policies and amended laws to contracts for leeway and to improve our economic condition.
(7.0) Conclusion
To conclude, we have ventured upon the current conditionings, the history of the Malaysian Ringgit, our nation's economic progress and factors that would influence exchange rates in Malaysia and its detrimental effects. We have also discovered the different exchange rate systems and the amount upon conversion.
(8.0) References;
Ashman Adam. (May, 2022) Report: All time high for Singapore dollar against Malaysian ringgit. Retrieved from, https://www.malaymail.com/news/money/2022/05/23/report-all-time-high-for-singapore-dollar-against-malaysian-ringgit/8458
Fang, L. (2015) An Empirical Investigation of Ringgit Malaysia. Thesis Submitted to School of Economics, Finance and Banking (SEFB). Universiti Utara Malaysia.
Trishal Ashvin Kaur, Vikneswaran Manual & Meera Eeswaran (2019) The Volatility of The Malaysian Ringgit; Analyzing Its Impact on Economic Growth. International Journal of Recent Technology and Engineering (IJRTE), 7(5), Pp 1-7.
Kiran Azeem, Zaeema Srar, Faiza Qamar & Muhammad Farrukh Aslam. (2017) Currency Prospects of Malaysian Ringgit - Current and Future Outlook on the Basis of Malaysian Economy. Research Journal of Finance and Accounting. 8(3), 1-6.
So Umezaki. (2019) The Malaysian Economy after the Global Financial Crisis: International Capital Flows, Exchange Rates and Policy Responses. Public Policy Review. 15(1), 1-30.
J.M. Shukri, Lee, C., & Zul Yusop. (2018) The study of exchange rates behaviour in Malaysia by using NATREX model. Journal of Fundamental and Applied Sciences. 9(3S), 697-715. doi: http://dx.doi.org/10.4314/jfas.v9i3s.55
Chan, T., & Hooy, C. (2013) Forecasting Malaysian ringgit: Before and after the global crisis. Asian Academy of Management Journal of Accounting and Finance. 9(2), 157-175.
Suhana Mohamed, et. al. (2021) Impact of Economic Factors towards Exchange Rate in Malaysia. International Journal of Academic Research in Economics & Management Sciences. 10(1), 81-91. http://dx.doi.org/10.6007/IJAREMS/v10-i1/9213
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