The Malaysia ringgit (RM) has fallen to multi-month lows. The ringgit hit 4.748 per U.S. dollar on November 4, 2022, its lowest level since the outbreak of the 2020 outbreak. Despite a rebound in the first quarter of the year, it hit a year-to-date low of 4.6765 against the U.S. dollar last Friday (June 23, 2023), at the time of writing (refers Figure 1).
Because the exchange rate is the trade between two types of currency, the depreciation of RM is attributed to the two main external factors:
(1) The negative differential due to the continuous rate hikes by the US Federal Reserve; and
(2) A weakening yuan subsequent lackluster Chinese growth and long period of lockdown.
The Fed is expected to continue raising interest rates, and Dollar strengthening could lead to further depreciation of RM in the coming months.
Since last year, the depreciation of RM has caused some major negative consequences on the economy. Malaysia’s import growth of consumption goods has already slowed in the first four months of this year, growing an average of 0.5% year on year, compared with a 24.2% year-on-year increase for the same period in 2022.
If RM continues to depreciate in the second half of the year, the repercussions might persist longer than expected. In Malaysia, intermediate goods and capital goods account for more than 80% of the gross imports (refers Table 1). Considering higher production costs, firms will likely continue to increase the price of goods and services and therefore increase the cost of living. Not only that, the depreciation of RM will also lead to a decline in import demand for consumer goods.
From a positive point of view, if the depreciation of RM persists longer than expected, it is likely to continue to benefit from the performance of the local economy from the two main angles. With the weaker ringgit, people would favor more cheaper locally made alternatives (refers Table 2). This will not only stimulus employment opportunities in the local market, but the relatively cheaper export price could also boost export demand (refers Table 2). The multiplier effect from the domestic- and import-oriented industries could enable the economy to generate even higher household income and overall economic growth.
Having said that, making full good use of RM depreciation is the right choice.
