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LETTER | Impact of US dollar’s appreciation on local economy

LETTER | The US dollar has appreciated significantly against the ringgit recently.

To put things in perspective, some economists and analysts point out that the ringgit has actually appreciated against some major currencies and other regional currencies. It is not that the ringgit is weak, but the dollar is strong.

However, what really matters to the domestic economy is the dollar's appreciation because the greenback plays a pre-eminent role in the global economy.

The dollar is widely used in international trade. Most commodities such as oil, copper and grain are priced in dollars. Its share of trade invoicing in the Asia Pacific region is 74 percent.

Foreign exchange or forex is the biggest and most liquid market in the world. The Bank for International Settlements (BIS) estimated that the total daily turnover in 2007 averaged about US$3 trillion.

Nowadays, investment funds invest in forex as an asset class, and they are accountable for 40 percent of the daily turnover. Others, such as importers, exporters, and travellers, deal in forex out of necessity. The dollar's share of foreign exchange transactions is 88 percent.

When it comes to international banking, it is accountable for 60 percent of international cross-border loans, cross-border deposits, and foreign currency debt. Our external debt is mainly denominated in dollars.

A higher dollar against the ringgit will thereby affect Malaysia in multiple ways. One obvious thing is higher import costs. Another less obvious thing is its impact on the external debt of Malaysia.

External debt is debt owed to non-residents or foreigners. The debt can be denominated in foreign currency or local currency.

Malaysia's external debt is about 70 percent of the country's GDP. The dollar has the biggest composition as it constitutes about 56 percent of external debt, while the ringgit is second at about 31 precent.

The rest are denominated in other currencies. The size of the country's external debt is about RM1 trillion in 2020. So, we are talking about RM560 billion of debt denominated in dollars.

The largest external debt component is offshore borrowing, which stands at RM624 billion. Short-term offshore borrowing is RM241 billion, and mid to long-term offshore borrowing is RM383 billion. The federal government's offshore borrowing is only about RM 25 billion. The offshore borrowing is denominated in foreign currencies and, most probably, the dollar.

The external debt is mainly owed by public corporations and private sector.

Looking at the external debt, it is hard not to see the dollar's significant appreciation against the ringgit will have a sizeable impact on the local economy as dollar-denominated debt forms about one-third of the size of our country's GDP.

As the value of the dollar rises, the dollar debt burden will become more expensive if the local companies mainly have ringgit revenue. Also, they will have to pay higher interest rates as US rates are rapidly rising. This will hit the balance sheet of companies which have sizeable dollar debt.

Some companies might also face rollover risks if the debts are short-term. They might also find it very expensive to hedge due to dollar funding stress.

If the dollar strength persists, some companies might reduce investment or cut their operating expenses and that, in turn, will hit employment.

It is probably time to look at the impact of dollar appreciation on the local economy squarely and take the necessary actions.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

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