Most Read
Most Commented
Read more like this
mk-logo
From Our Readers
State of the Malaysian ringgit - what say you...

You are a final year financial management student and have to answer a question in a final paper on the state of RM (ringgit Malaysia). This question carries 30 marks. What would the answer be? If you read the local mainstream newspapers, you could find the answers.

The Malaysian Institute of Economic Research (MIER) said “speculative elements” had caused the ringgit to overshoot its fair value, which once removed, could see the local currency appreciating by about 10 percent against the US dollar.

The second finance minister said the fundamental cause of the ringgit’s depreciation was because Donald Trump was elected as the next president of the United States. Another reason highlighted was it is partly due to the fact that Malaysia has one of the more globalised bond markets.

Your paper now is in the hands of the examiner. How do you think the examiner will mark or assess your paper having included the above points? It is customary for them to look for clear and concise answers. It has to be clearly defined, supported by facts or proof that summarise the essential features. Comparisons would be a definite advantage. Normally, examiners don’t like unsupported opinions.

In this case, you need to define “speculative elements” and did you give sufficient facts or proof? And how do you justify the results of the US presidential election is a fundamental cause of the RM depreciation?

There was no clear definition of “speculative elements” in MIER’s statement.

As for the results of the US presidential election or “Trump tantrum”, the RM has taken it on the chin since his surprise win. We also need to assess our position vis-a-vis our biggest trading partner and our immediate neighbours ie China, Thailand and Singapore.

Using Bank Negara Malaysia rates (from the Interbank Foreign Exchange Market in Kuala Lumpur at 11.30am) and comparing the exchange rates on Nov 1 (before the US presidential elections) and Dec 1, against the three countries, the results are not satisfactory. The Chinese yuan and Thai baht strengthened about 5 percent and Singapore dollar about 4 percent against the RM.

If we go back further to Jan 2, 2013, the yuan, baht and S$ have strengthened 33 percent, 26 percent and 25 percent respectively against the RM.

You can say the time when the RM crashed to as low as RM4.725 to the US$ on Jan 7, 1998 is the worst. Let us be wary that we are still in the middle of a whirlpool.

Let us now look at the real effective exchange rate (REER). It is the weighted average of a country’s currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The World Bank website on REER index (taking year 2010 = 100) shows that in 2015, RM slid to around 92 while yuan and S$ increased to 131 and 111 respectively. There were no figures for baht. US$ itself increased to around 114.

For 2016, obviously the position will not be better for RM.

You could have also justified that since RM was one of the better performing currencies in the first five months of the year, the impact is more pronounced.

However, it would be difficult to argue on the slide despite having had a successful outing in China with deals amounting to RM144 billion.

Mitigating measures

To score more points, you have to include mitigating measures.

One is by holding and protecting the RM. But given that reserves have been declining, it would be a very challenging endeavour especially when there is imminent Federal Reserve lift-off in mid-December. Sadly, Malaysia has among the lowest coverage of external liabilities in Asia.

It does not help either when we need to roll over a large stock of short-term external debt. It was reported that it is around 28 percent of our gross domestic product (GDP). In short, it will be more expensive to service debts.

You may also include that the International Monetary Fund (IMF) is supportive of Malaysia floating the currency as the best line of defence as the ringgit’s movement is out of our control. But then it is difficult to support since it is not the official stand of IMF. It was through an ‘unofficial dialogue’ between the IMF managing director and our prime minister at the recent Asia-Pacific Economic Community (Apec) leaders meeting.

A statement from a prominent Malaysian economist that the RM value is continuing to decline pointing to a confidence deficit due to the 1MDB scandal really has a huge negative impact.

I guess it will be very difficult for you to score points for this question. However, since you are in a local university, the examiner/s may partly understand your predicament. It would be different if you are at a foreign university or taking a professional external examination.

Unless if you could score on the other questions, you may have ‘cukup makan’ or even fail the paper.

All the best to you.

What say you...

ADS