Hold your horses! | The Star

DISCUSSIONS over the fate of the ringgit resurface every now and then. This time, the local currency depreciated against the US dollar to its 26-year low of RM4.80 on February 20, 2024.

A sequence of events had occurred in the past few weeks, impacting the ringgit. They revolved around the timing of the US rate cut, which seems to be elusive at this current juncture as the US inflation rate is taking its own sweet time to reach the 2% goal.

Anxiety attacks hit the foreign-exchange (forex) market as the odds for the rate cut diminished at an astonishing pace. Not to mention, major economies, namely the UK and Japan, fell into recession in the final quarter of 2023.

And most recently, China’s central bank has reduced the 5-year Loan Prime Rate (LPR) by 25 basis points from 4.20% to 3.95%, which is more than what the market had anticipated. The icing on the cake: Thailand prime minister has openly urged the Bank of Thailand to bring down the benchmark interest rate as the economy is on the cusp of recession.

One cannot help but feel the pressure to push the panic button. Among the ideas that are being discussed to arrest the local unit’s slide include reintroducing the ringgit peg, raising the Overnight Policy Rate (OPR) to close the gap between the US rates and Malaysia’s benchmark rate, and intervening in the forex market.

While such ideas can be quite compelling, the reality is that there is no assurance that these moves will elevate the value of the ringgit to its desired level, given the fact that market forces will remain the dominant factor in determining the local unit’s value. At times, the market can be irrational, leading to the currency value to overshoot momentarily.

Is it worth the risk to be panicking? Certainly not.

If one were to look at the country’s fundamentals, perhaps we could gain some sanity. First, almost all of the government debts are denominated in ringgit. As of the third quarter of 2023, 97.4% of the total government debt is in ringgit.

Therefore, the weak ringgit will not compromise the government’s ability to repay its debt as it can always issue new debts to refinance the existing debt obligation. Large institutional investors such as pension funds, banks, insurance companies, asset managers and foreign investors are more than happy to purchase the bonds issued by the federal government as they carry zero default risks as well as being highly liquid and tradable.

Malaysia’s external debt was estimated at 68.7% of GDP in the third quarter of 2023. However, excluding the non-resident holdings of ringgit- denominated debt securities and non-resident deposits, the external debt is effectively at about 37.4% of GDP. This is not alarming.

The banking system’s capitalisation was also high with Total Capital Ratio lingering at 18.2% as of December 2023. This was way above the minimum level of 8%, which indicated that the banks had more capital to grow their business, ie extending financing to the businesses and consumers. True enough, total outstanding loans grew 5.3% in December 2023 from 4.2% in July last year.

Asset quality within the banking system was also in good shape with gross impaired financing ratio dropping to 1.65% as of December 2023 from 1.73% at the beginning of last year. The banks were also highly liquid, which meant that they were able to honour requests for withdrawals with Liquidity Coverage Ratio (LCR) standing at 160.9% as of December 2023, well above than the minimum level of 100%.

Judging from these numbers, it looks like ‘business as usual’ for businesses and households as consumers are able to tap the banking institutions for financing and deposit their funds.

Having said that, these statistics are not meant to downplay the effects of a weak ringgit. Yes, the depreciating currency will result in higher prices as the country has been importing more food every year, along with other products and services. The trade deficit for agri-food, for instance, has widened to RM32.3 billion in 2023 from merely RM1.1 billion in 1990.

The international remittance by foreign labour is also on the rise with data from balance of payments showing that compensation to employees on a net basis stood at RM8.2 billion in 2023, compared to only RM534.8 million in 2005, suggesting that the country’s reliance on foreign workers has taken a toll on our balance of payments.

However, these are structural issues which require careful planning and execution of policies that would allow ample time for capacity building. Certainly, panicking will not help resolve these issues.

We should take stock of why the ringgit has been weak and come up with long-term remedies that will help the country regain its stature in the eyes of foreign investors in the capital market, while ensuring the execution of economic reforms are done at the right pace. If we can do this right, surely foreign capital will flow in and ringgit will self-correct to its fair value seamlessly.

This article first appeared in Star Biz7 weekly edition.