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PETALING JAYA: Having lost 12% of its value against the US dollar since February, the weaker ringgit may have helped to avert a worse contraction in Malaysian exports this year.
However, the benefits of a soft ringgit are arguably limited as the country’s exports continued to shrink for seven consecutive months amid the global demand slowdown.
On the tourism front, the weak ringgit has also not managed to attract foreign visitors comparable to the pre-pandemic levels.
According to Tourism Malaysia, in the first six months of 2023, the volume of tourists from the United States was 25.4% lower than the same period in 2019.
Visitors from Singapore for the period also reduced by close to 28% as compared to the January-June 2019 period. It is noteworthy that the ringgit has depreciated by almost 8% against the Singapore dollar since February.
Earlier this week, the ringgit suffered another blow as it slid to an all-time low against the Singapore dollar, breaching the RM3.50 mark.
A week earlier, the currency fell to its lowest level since the Asian Financial Crisis as it was weighed down by the nation’s widening interest rate differential with the United States.
As criticism pours on the government of Datuk Seri Anwar Ibrahim for not acting on the ringgit’s sluggishness, the currency weakness could be a blessing in disguise to some extent.
Had the ringgit been stronger, the consistent downtrend in exports would have been worse, economist Geoffrey Williams told StarBiz.
The economics professor at the Malaysia University of Science and Technology said the weaker exchange rate is “doing its job” as an automatic stabiliser to allow adjustment of foreign exchange prices and helps to maintain a trade surplus.
“Imports have also been lower probably due to higher prices because of a weaker exchange rate.
“So, this has helped the trade surplus remain around RM20bil per month.
“Although this is more volatile, it is nonetheless consistently positive and adds net value to the gross domestic product,” said Williams.
In September 2023, exports dropped by 13.7% year-on-year (y-o-y) to RM124.47bil amid slower global demand, uncertainties in commodity prices and the high base effect last year.
Imports also edged down by 11.1% y-o-y to RM99.95bil in September 2023.
CGS-CIMB Research economist Nazmi Idrus described the current export weakness as “cyclical in nature”, due to the weakening global export demand.
“But the weak ringgit could be a blessing in this situation which could partly help to mitigate further export weakness,” he said.
Nazmi further noted that there needs to be a “consistent and prolonged” weakness in the ringgit to yield any material gain to exports.
“The key here is stability rather than fluctuations.
“Too volatile a currency may even lead to losses because sometimes products are sold in advance,” according to him.
He also opined that a weak ringgit relative to the currencies of Malaysia’s trading partners does provide some benefit, subject to certain factors.
“If the export product has a low import content, then the exporter will gain. But if the import content is high, then any gain is offset by higher import prices,” he said.
Looking ahead, Nazmi foresees that Malaysia is nearing the end of its trade weakness.
He said China’s economy seems to have bottomed out and is expected to inject a substantial stimulus, while in the United States, the fear of recession is overbought.
“We may see exports slowly rebounding and perhaps turning positive year-on-year in early 2024.
“There are some signs that indicate the end of trade weakness.
“For instance, the US manufacturing purchasing managers’ index (PMI) is showing less contraction, similar to China’s PMI.
“We also saw global sales of semiconductors getting slightly better. Note that about 40% of Malaysia exports are in the electrical and electronics segment,” he said
Centre for Market Education (CME) chief executive officer Carmelo Ferlito believes that the ringgit is under stress mostly because of external factors.
“This does not mean, however, that domestic factors are at play too and at this level an action plan can be deployed,” he said.
While the ringgit is pressured by a number of external factors such as the Federal Reserve’s monetary policy direction, the strong US dollar and a weak Chinese economy, Ferlito highlighted that there are also domestic factors.
The most important factor is the abundance of conflicting messages from the policy perspective.
“We get commitment to fiscal discipline and yet the biggest budget ever.
“Price controls were removed only recently despite statements in favour of a pro-investment ecosystem.
“The Madani Economy seems to be open to the market economy, while the 12th Malaysia Plan mid-term revision hinted at a heavier role for the government.
“The scenario described so far makes it difficult to identify a policy plan: monetary policy is unlikely to have any sensible effect while at the same time the government cannot solve global economic conflicts,” he said.
In order to strengthen the ringgit, CME urged the government to speed up the signing of more bilateral free trade agreements and to reduce the reliance on trade with China.
Ferlito also called for a faster rebuilding of the manufacturing base as hinted by the New Industrial Master Plan 2030.
“Also, improve the consistency of the policy strategy, committing the country to attract foreign investments and to build the right ecosystem for nurturing domestic entrepreneurship and favour industrial concentration in order to spur technical progress,” he added.
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