The Ringgit's Rollercoaster: Navigating Malaysia Ringgit Volatility

The Malaysian ringgit is currently facing its most severe depreciation since the Asian financial crisis over two decades ago, descending to a 26-year low of 4.7965 against the US dollar on February 20. This significant drop has prompted urgent responses from top officials, including Prime Minister Anwar Ibrahim, who described the situation as "concerning" yet "under control." In a bid to stabilize the currency, Bank Negara Malaysia (BNM), the central bank, has been proactive in defending the ringgit.

In the long run, the ringgit's trajectory remains uncertain. Despite the government's efforts and an improving economic outlook suggesting potential stabilization, analysts remain cautious, acknowledging the ongoing vulnerability of the ringgit and its potential inflationary impacts on Malaysian consumers. 

The situation is closely monitored, with hopes pinned on the impending US Federal Reserve rate cuts to alleviate some of the external pressures on the ringgit and other emerging-market currencies.

Understanding Foundations of Currency Valuation

Currency valuation is pivotal in shaping a nation's economic landscape, reflecting its trading relationships and overall economic health. Currency Exchange Rates are influenced by a myriad of factors that determine a currency's strength or weakness relative to others. These rates not only affect international trade dynamics but also have a profound impact on the domestic economy and the real returns of investments. 

Key Factors Influencing Currency Valuation:

• Inflation: Typically, a country with consistently lower inflation exhibits a rising currency value, as its purchasing power increases relative to other currencies. This phenomenon attracts more foreign buyers, increasing demand for the country’s goods and, by extension, its currency.
• Interest Rate: Interest rates are a primary monetary tool for central banks to regulate economic activity. High interest rates attract foreign capital, boosting the currency's value due to the higher returns on investments denominated in that currency. Conversely, lower interest rates can decrease a currency’s value as investors seek higher yields elsewhere. Since August 2022, the US’ interest rates have surpassed BNM’s Overnight Policy Rate, making the dollar more attractive to global investors.
• Current Account Deficits: The balance of trade between a country and its trading partners—captured in the current account—also affects the exchange rate. A deficit indicates more capital flowing out than in, which typically devalues the currency as the country needs more foreign currency to fund its imports.
• Public Debt Levels: Countries with large public debts are less attractive to foreign investors because of the potential risks of inflation and default. This can lead to a decrease in currency value as the likelihood of the government financing its debts by inflating the money supply grows.
• Terms of Trade: An improvement in a country's terms of trade (when export prices rise relative to import prices) enhances the value of its currency. This occurs because higher export prices increase the revenues from trade, leading to a higher demand for the country's currency.
• Economic Performance and Stability: Investors look for stable countries with strong economic performance to invest their capital. A robust and growing economy attracts foreign investments, leading to an appreciation of the country's currency.

Decoding the Downturn: Factors Behind the Malaysian Ringgit's Slide

The Malaysian ringgit’s recent decline is not just a reflection of transient market trends but a complex interplay of both internal fiscal dynamics and broader global economic shifts. Despite Bank Negara Malaysia (BNM) Governor Abdul Rasheed Ghaffour's assertions that the ringgit's current depreciation does not mirror the country's economic potential and is undervalued, its significant drop against the US dollar is a concern to those earning in ringgit. 

So, what exactly is driving this trend? Let’s delve into the reasons.

1. The Influence of US Monetary Policy and Dollar Strength on the Ringgit

When the US dollar strengthens, it affects emerging market currencies, including the Malaysian ringgit, due to its role as a global reserve currency and a primary medium in international transactions. As global uncertainties rise or the US economic outlook improves, investors typically shift towards US dollar-denominated assets, perceived as safer. This movement reduces demand for the ringgit, causing its depreciation.

Additionally, US Federal Reserve interest rate policies significantly influence this trend. Higher interest rates in the US enhance the appeal of US treasury securities and other dollar-denominated investments, hence attracting global capital. This leads to increased demand for the dollar and reduced demand for the ringgit, further driving down its value.

With US interest rates at 23-year highs, investors have flocked to seek better yields from US treasuries. While the market has expected the Fed to cut rates this year, forecasts for rate cuts have been pushed out as inflation has remained above the Fed’s target rate of 2%.

2. Malaysia's Export and Trade Dynamics:

Malaysia's economic stability heavily depends on exports, particularly commodities like oil. In 2023, despite oil exports generating RM28.7 billion in revenue, overall export volumes declined across various sectors. This downturn led to a negative shift in the trade balance, meaning Malaysia earned less foreign currency from overseas sales. With reduced exports, there's less demand for the ringgit, contributing to fluctuation of ringgit. 

3. Economic Slowdown in Major Trade Partners

An economic slowdown in China, a major trade partner for Malaysia, significantly impacts Malaysian exports. As China's economy falters, its demand for Malaysian goods decreases, leading to lower export revenues. This reduction directly weakens Malaysia’s trade balance, reducing the influx of foreign currency and putting downward pressure on the ringgit. With predictions of China’s recession extending in 2024, the prospects for Malaysia's export-led growth remain dim, further exacerbating the slide of the ringgit.

4. Domestic Economic Policies and Government Debt:

Persistent high levels of government debt coupled with continuous deficit spending erode confidence in the government's financial discipline. Investors fear that the government might resort to inflationary measures or increase taxes to service its debt, which can stifle economic growth. The lack of substantial measures to tighten fiscal policy makes it challenging to attract foreign investment, crucial for supporting the ringgit. This perceived economic mismanagement and uncertainty deter investment and contribute to the ongoing depreciation of the currency.

5. Monetary Policy and Inflation Concerns

The depreciation of the Malaysian ringgit has a direct and significant impact on the cost of imports, particularly for essential goods such as food, which Malaysia imports substantially. As the ringgit loses value against other currencies, the cost of purchasing these imported goods increases. This rise in import costs then translates into higher prices for consumers, contributing to domestic inflation. This inflation, driven by higher costs for imported goods, reinforces the cycle of currency weakening, as a depreciating ringgit makes imports even more expensive, thereby exacerbating the inflationary pressures.

Although Bank Negara Malaysia has increased the overnight policy rate to 3% since May 2023, it remains lower than the U.S. rates. This discrepancy creates a challenge. Typically, higher interest rates in a country increase the returns on deposits relative to other countries, making the currency more attractive to foreign investors. However, with U.S. rates still higher, the ringgit's attractiveness diminishes in comparison. This situation can lead to capital outflows as investors seek better returns in U.S. dollar assets, further increasing the supply of ringgit on the foreign exchange markets. 

Comparing MYR with Other Emerging Market Currencies

Have you ever wondered how the Malaysian Ringgit (MYR) fares against other emerging market currencies? Understanding this comparison is essential for grasping the broader economic dynamics that influence our daily economic environment. Here’s a quick look at how the MYR stacks up in the global market:

* data as of 22nd Apr 2024

The Year-To-Date depreciation data for the Malaysian Ringgit and other emerging market currencies reveal a common trend: nearly all are facing depreciation against the US dollar, highlighting the global pressures impacting emerging markets broadly. With a depreciation rate of -3.83%, the Ringgit is within the range of other affected currencies, showing that while it has its unique challenges, it shares the broader struggle against a strengthening US dollar. This pattern underscores that factors such as US monetary policy, global economic uncertainties, and shifting trade dynamics are universally influencing emerging markets, affecting their currency values in a somewhat uniform manner.

Strategies to Safeguard Your Wealth Against the Depreciating Ringgit

In the face of the Malaysian Ringgit's depreciation, it is crucial for individuals to explore strategies for safeguarding their financial future. Here's a detailed look at how you can preserve and potentially enhance your wealth by diversifying your assets beyond the fluctuating local currency. You can also read up our comprehensive guide on how to safeguard your Ringgit.

1. Invest in US Treasury Bonds via StashAway’s USD Cash Yield Portfolio

While direct investment in US Treasury bonds might not be feasible for most Malaysians, StashAway's USD Cash Yield Portfolio offers an alternative. This platform allows investments in short-term US Treasury bonds with an expected yield of 5.3% p.a., providing an opportunity to earn in USD and benefit from the stability and liquidity of US government-backed securities. 

2. Diversify with Multi-Currency Accounts

One straightforward strategy is to convert your holdings into stronger currencies. Thanks to advancements in banking, Malaysians today have access to multi-currency accounts offered by several major banks. These accounts allow you to hold and manage multiple currencies, providing a hedge against Ringgit depreciation and facilitating easier transactions for investments and travel abroad.

3. Invest in Gold

Gold has long been regarded as a safe haven asset, maintaining its value through economic tumults. While it might not offer the high returns of other investment classes over the long term, gold is a reliable store of value. Investing a portion of your assets in gold can help preserve your wealth as the Ringgit fluctuates. Read our comprehensive guide on how to invest in gold.

4. Explore International Stocks

Broadening your investment horizon to include international markets can provide exposure to more robust economic environments and stronger currencies. Platforms are now readily available that allow Malaysians to invest in U.S. stocks and ETFs, diversifying your portfolio beyond local stocks which may be negatively impacted by a weak Ringgit.

5. Focus on Export-Driven Malaysian Stocks

If international investing seems daunting, consider Malaysian companies in the export sector. These companies earn revenue in foreign currencies like USD, which can translate to higher Ringgit returns when converted, benefiting from the currency's depreciation.

The Malaysian Ringgit has faced significant depreciation challenges, reaching a 26-year low against the US dollar, prompted by a combination of internal economic pressures and global financial dynamics. In response, strategies have been employed by both individuals and the central bank to mitigate the impact of this depreciation. Individuals are advised to diversify their investments across various asset classes, including multi-currency accounts, gold, international stocks, and US Treasury Bonds through platforms like StashAway's USD Cash Yield. Additionally, investing in local export-driven stocks and real estate can also provide a hedge against the weakening Ringgit.

Efforts to stabilize the Ringgit include monitoring by Bank Negara Malaysia and anticipations of policy adjustments by global economic influencers like the US Federal Reserve. By understanding and utilizing these strategic approaches, individuals can protect their financial assets from the adverse effects of currency fluctuations, ensuring a more stable and prosperous economic future despite ongoing challenges.