Two factors causing ringgit to drop

01 Jun 2023 12:29pm
The ringgit's value will continue to decline amidst the uncertainty in the global market
The ringgit's value will continue to decline amidst the uncertainty in the global market

SHAH ALAM - The value of Ringgit Malaysia (RM) is experiencing a constant decrease, believed to be caused by the combination of falling oil prices and the anticipated increase in interest rates in developed countries next month.

Future Labor Market Research Center (EU-ERA) economist Muhamad Zharif Luqman Hashim explained that the ringgit is facing depreciation pressure as investors redirect their funds to take advantage of better interest rates.

"The higher interest rates in developed countries could make their currencies much more appealing for investors looking for higher yields. This would lead to capitals flowing out of a developing country's market like Malaysia.

"Oil prices dropping are causing Malaysia's export revenue to decrease, which affects the country's trade balance. This results in a decrease in foreign exchange, potentially placing pressure on the ringgit," he said.

The depreciating ringgit has led to higher import costs, which can have adverse effects on businesses and consumers who rely on imported goods.

"It must be reminded that Malaysia continuously imports agro-food items such as wheat where the decline in ringgit would result in higher food items cost.

"The decrease in ringgit would also contribute towards inflation. When the import costs increase by a weak ringgit, businesses may channel the increase in costs towards consumers by increasing the cost of goods.

"This would bring a higher inflation rate affecting the purchasing power of individuals and potentially compromising the people's standard of living," he said.

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Zharif compares the ringgit to the Singapore Dollar (SGD) and noted that the neighboring country's currency is more resilient.

"Singapore adopts an interest rate based on the market, which correlates with the United States (US) interest rate. This approach reduces pressure when the US dollar strengthens. In contrast, the weakening of the Ringgit's value may provide some benefits to exporters, as it makes Malaysian goods cheaper for foreign countries. "This situation has the potential to enhance Malaysia's export competitiveness and increase export volumes in the international market," he added.

On the nation's economic growth forecast, Zharif emphasises that the weaker ringgit could affect inflation, import costs, and the trade balance. In light of changing circumstances, he urges the government to potentially revise economic growth projections and adjust policy responses accordingly.

"Dealing with currency depreciation effectively often requires a comprehensive approach that considers monetary, fiscal, and structural measures. The effectiveness of these measures may vary depending on specific circumstances and the underlying causes of the Ringgit's decline," he said.

Meanwhile, Malaysian Economic Research Institute research chief Dr Shankaran Nambiar pointed out that the volatile US currency and various factors contribute to the fall of the ringgit.

"Recent discussions on the US debt ceiling and concerns about inflation and pressure have prompted investors to seek safe currencies, and the ringgit is not among them. This led to the outflow of funds from Malaysia. In addition, China had not been performing well economically as the country's major trading partner.

"The devaluation of the Yuan against the US dollar indirectly affects Malaysia's economy," he said.

Nambiar also clarifed that the ringgit's value will continue to decline amidst the uncertainty in the global market.

"The unresolved issue of the US debt ceiling and the anticipated interest rate hikes in September will subject the ringgit to an uncertain phase for an extended period. "As the value of the ringgit weakens, fuel costs increase, and the government may have to spend more on maintaining subsidies.

"Import costs for food items such as meat and vegetables would also rise. If these issues persist, the inflation rate will increase, prompting the government to review the country's economic growth forecast for this year," added Nambiar.

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