External factors

PETALING JAYA: The weak ringgit, which sold at RM4.767 to the US dollar at the close of trading yesterday, is caused by geopolitical uncertainties and has nothing to do with the country’s economic fundamentals, said experts.

Malaysia University of Science and Technology provost for research and innovation Prof Geoffrey Williams said international developments outside the control of policymakers also contributed to the weak ringgit.

One such development is China’s weaker growth and the weakness of its yuan, which has also weighed on the ringgit, as that country is Malaysia’s top trading partner.

“The situation is worse now than previously due to the current Middle East conflict.”

He said currencies are always driven by market forces. Hence, the ringgit has to respond to the market value of the dollar, which is outside Malaysia’s control.

“Exchange rates are determined by market forces in all circumstances in the short and long term. In most cases, they are determined by factors beyond the control of monetary authorities since they involve economic conditions in other countries.

“A decade ago, the ringgit was around RM3 to US$1. Since 2015, it has been consistently above RM4 to US$1 and since January 2022, it has ranged between RM4.20 and RM4.78.”

Williams said in 1998, the ringgit was pegged to the US dollar during the Asian Financial Crisis.

“But this is not a solution for the current situation as Malaysia’s international currency reserves of US$111.4 billion (RM530.5 billion) as of June 30 is too low to sustain any such intervention.

“Also, raising the overnight policy rate (OPR) would damage the economy and weaken the ringgit further.

“The OPR cannot be used because higher interest rates will damage domestic growth and weaken the debt sector.”

He said government inaction is not a cause for concern because there is little that can be done to halt the ringgit’s slide, except to maintain a str“Governments and Central banks cannot control exchange rates because it has been proven ineffective everywhere in the world where it was attempted.

“Furthermore, Malaysia is a small open economy and does not have the economic size or reserves to influence global markets.

“So, it has to control and implement structural policies that can increase economic growth to effect what it can influence in the domestic market,” he said.

Putra Business School Assoc Prof Dr Ida Yasin said: “There is nothing that Bank Negara Malaysia (BNM) can do since it does not have a lot of international reserves to strengthen the ringgit.

“We can only look at the long-term fundamentals of the economy and try to optimise it. This will help investors gain confidence to invest in Malaysia and hold the ringgit based on underlying economic strength.”

She said the only way to strengthen the ringgit is to focus on improving the fundamentals of economic policy.

“BNM has to meet market liquidity requirements and maintain sound fiscal and monetary policies to promote price stability, sustainable growth and investment.

“The policies will help improve the efficiency of the intermediation process in terms of greater reliance on the market. This will help facilitate access to funding and extension of credit.

“In return, it will help create conditions to enable banking institutions to prioritise credit facilities to support more productive activities,” Ida said.

from Highlights https://ift.tt/AR5EJfY
via IFTTT