November 17, 2015

The ringgit has undergone a steady depreciation since the beginning of August in spite of the government’s attempt to rein in the wayward currency at the beginning of October. After being dragged down by a series of events that shook investor confidence, the ringgit depreciated to a 17-year low of 4.46 MYR per USD on 29 September. It then gained ground during the first week of October and subsequently stabilized during the second week following a government-led intervention in the stock market and a temporary rally in oil prices. However, the value has fallen steadily since then. On 12 November, the ringgit closed at 4.37 MYR per USD, marking a 5.4% depreciation over the previous corresponding day last month. On the same day, the ringgit recorded a 24.8% year-to-date loss, and a 30.9% deprecation over the same period last year.



Throughout the year, the ringgit has been battered by contracting exports and capital flight in anticipation of the Fed’s impending rate hike and the slowdown in China. Recently, a political crisis and the precarious position of the overleveraged 1MDB investment fund exacerbated the situation and led to a rapid decline in the ringgit’s value. This has forced the Central Bank into a Catch-22 , where it can defend the currency, but in doing so it expends foreign reserves. Should the Bank go through reserves too quickly, investors could see this as a reason for concern and drop ringgit denominated assets at an even quicker rate. Although a weaker exchange rate can lead to higher imported inflation and an increased debt burden, the Central Bank will likely avoid intervening to a significant extent as inflation will be suppressed by lower commodity prices and the debt burden is still within manageable limits.



The good news is that the fundamentals for the Malaysian economy are robust. Q3 growth came in at 4.7%, which was slightly softer then than last quarter’s result, but still strong in the face of external headwinds. The Malaysian financial system is well capitalized, and has withstood recent pressures. On 12 November, Central Bank Governor Zeti Akhtar Aziz spoke out in defence of the economy, stating that the value of the currency did not reflect the country’s sound economic environment. Indeed, if political uncertainty dissipates as corruption allegations get resolved, the currency should see its value increase.



In terms of the real economy, the currency should provide a boost to the fledgling export sector as a weaker ringgit will translate a price advantage for exporters. This will improve growth prospects. On the other hand, it will also put upward pressure on inflation. The Central Bank’s confidence in its hands-off approach, coupled with the low probability of a rebound in energy prices, will likely keep the ringgit above 4.00 MYR per USD through the next two years.