Malaysia, the Southeast Asian nation known for its rich natural resources and diverse culture, has been facing a severe currency crisis in recent months. The ringgit, the Malaysian currency, has fallen to its lowest level since the Asian financial crisis in 1998, reaching almost 4.8 against the US dollar on February 20, 2024. The ringgit has been one of the worst-performing currencies in Asia, losing more than 4% of its value since the start of the year. The currency’s decline has raised concerns about the economic and social impact on the country and its people.
What are the causes of the ringgit’s fall?
The ringgit’s fall can be attributed to a combination of internal and external factors, such as:
- Weak export performance: Malaysia’s exports, which account for about 60% of its gross domestic product (GDP), have been hit hard by the slowdown in China, its largest trading partner. China’s economy grew by only 4.9% in 2023, the lowest rate in 30 years, amid the COVID-19 pandemic and the trade war with the US. Malaysia’s exports to China fell by 12.5% in 2023, while its total exports contracted by 8.7%.
- Rising US interest rates: The US Federal Reserve, the central bank of the US, has been raising its benchmark interest rate since 2022, in response to the strong recovery of the US economy and the rising inflation pressures. The Fed’s rate hikes have boosted the demand for the US dollar, as investors seek higher returns and safer assets. The ringgit, along with other emerging-market currencies, has suffered from the capital outflows and the appreciation of the US dollar.
- Political uncertainty: Malaysia’s political situation has been unstable and unpredictable since the 2018 general election, which resulted in the first change of government in the country’s history. The ruling coalition, led by Prime Minister Mahathir Mohamad, has faced internal divisions and challenges from the opposition parties, as well as from the former Prime Minister Najib Razak, who is facing corruption charges. The political uncertainty has eroded the confidence and credibility of the government, and has hampered its ability to implement effective policies and reforms.
What are the consequences of the ringgit’s fall?
The ringgit’s fall has had significant consequences for the Malaysian economy and society, such as:
- Higher inflation and lower purchasing power: The ringgit’s fall has increased the cost of imported goods and services, such as food, fuel, and raw materials, which has pushed up the inflation rate in the country. The inflation rate rose to 3.5% in 2023, the highest level since 2011, and is expected to remain above 3% in 2024. The ringgit’s fall has also reduced the purchasing power of the Malaysian consumers, especially those who earn or spend in foreign currencies, such as tourists, students, and migrant workers.
- Lower growth and investment: The ringgit’s fall has dampened the growth prospects and the investment climate of the Malaysian economy, which relies heavily on foreign trade and investment. The GDP growth rate slowed down to 4.2% in 2023, the lowest rate since 2009, and is projected to moderate to 4% in 2024. The foreign direct investment (FDI) inflows declined by 15.3% in 2023, and are expected to remain subdued in 2024.
- Higher debt and deficit: The ringgit’s fall has increased the burden of the public debt and the fiscal deficit of the Malaysian government, which are denominated partly in foreign currencies. The public debt rose to 58.5% of GDP in 2023, the highest level since 1990, and is expected to increase further to 59.5% of GDP in 2024. The fiscal deficit widened to 4.5% of GDP in 2023, the highest level since 2009, and is expected to narrow slightly to 4.2% of GDP in 2024.
What are the solutions for the ringgit’s fall?
The ringgit’s fall requires a comprehensive and coordinated response from the Malaysian authorities and stakeholders, such as:
- Boosting export competitiveness: The Malaysian government and the private sector should work together to enhance the export competitiveness of the Malaysian products and services, by diversifying the export markets and products, improving the quality and innovation, and reducing the costs and barriers. The government should also pursue more free trade agreements and regional integration initiatives, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).
- Managing monetary policy: The Bank Negara Malaysia (BNM), the central bank of Malaysia, should manage its monetary policy in a prudent and flexible manner, by balancing the objectives of price stability, exchange rate stability, and economic growth. The BNM should also monitor and intervene in the foreign exchange market, when necessary, to prevent excessive volatility and speculation on the ringgit.
- Strengthening fiscal discipline: The Malaysian government should strengthen its fiscal discipline and consolidation, by reducing the public debt and the fiscal deficit, and by improving the efficiency and transparency of the public spending and revenue. The government should also implement structural reforms and fiscal stimulus measures, such as enhancing the tax system, promoting the digital economy, and supporting the vulnerable groups.
The ringgit’s fall is a serious challenge for the Malaysian economy and society, as it has been caused by a combination of internal and external factors, and has resulted in higher inflation, lower growth, and higher debt. The ringgit’s fall requires a comprehensive and coordinated response from the Malaysian authorities and stakeholders, who should work together to boost the export competitiveness, manage the monetary policy, and strengthen the fiscal discipline of the country. The ringgit’s fall also offers an opportunity for the Malaysian economy and society to transform and adapt to the changing global and regional environment, and to achieve a more sustainable and inclusive development.
February 21, 2024 7:17 pm