Is Malaysia in crisis because of the value of the ringgit?

The dark memories of the Asian Financial Crisis have resurfaced among those who experienced it, expecting a swift and decisive response from the government, just like in 1997-1998.

MALAYSIA’S latest gross domestic product (GDP) performance fell short of expectations, but at this stage, it does not appear that the economy is in a crisis.

At the point of writing, Ambank is pencilling in Malaysia’s growth to rebound to 4.5% in 2024 versus 3.7% in 2023.

Emerging currencies have been taking a beating amid a strong US dollar over the past two years.

The ringgit has been performing poorly in recent years, and more apparently so in the post-pandemic era.

Again, Ambank expects the local note to recover some lost ground to around RM4.50RM4.60 against the greenback by year-end when strong signals of US rate cuts start to appear.

The Malaysian annual real GDP is growing steadily but it has yet to sustainably return to its pre-pandemic levels.

Meanwhile, the ringgit has hit lows not seen since the Asian Financial Crisis (AFC); the underlying causes leading to its current trading level are starkly different.

Despite this, public sentiment suggests that Malaysia is already embroiled in a crisis in one way or another.

As far as the economy is concerned, the government’s response has been largely reactive. Public outcry about the state of the economy continues, demanding the government’s urgent attention and take tough decisions to put these issues to rest.

In short, while Malaysia is not in a crisis by any measure, yet many people feel strongly as though it is.

The dark memories of the AFC have resurfaced among those who experienced it, expecting a swift and decisive response from the government, just like in 1997-1998.

However, despite the ongoing pressure on the ringgit, everything is business as usual. This is not surprising as the ringgit is not in a free fall as it was during the AFC.

For comparison, during the AFC, the ringgit dipped sharply to an intra-day low of RM4.89 from pre-afc’s RM2.49 per US dollar.

This is more than 90% depreciation in merely six months, which is a way larger and sharper movement compared to the current trend; from RM4.05 pre-pandemic low on Jan 20, 2020, to RM4.85 intraday high on Feb 21, 2024.

The people want the government to address their woes with a credible government response, but not necessarily a similar policy action to the past.

The current situation is predominantly influenced by the strength of the US dollar and other currencies that are tied to it.

As the US economy continues defying a recession or a significant slowdown, the US dollar remains strong to this day.

It is unclear whether the required policy response, if any, ought to gravitate towards achieving short or long-term goals to boost the value of the ringgit.

Should government intervention address the cyclical or structural issues affecting the local note? Additionally, which economic policy should take precedence in improving the ringgit’s prospects, fiscal or monetary?

The most logical way the government can do this is to stimulate the economy through a massive spending spree so inflation could go up and, subsequently, necessitate a monetary action to protect the ringgit’s value through a higher interest rate.

Because of the large gap in sovereign credit rating between the United States and Malaysia, the overnight policy rate (OPR) cannot be used arbitrarily to preserve the currency’s value in the short term.

On the contrary, a higher OPR can boost the ringgit’s value in the middle to the long term, but it must be done organically.

Some questions need to be considered regarding this policy option. Firstly, what should the government spend money on? Direct cash handouts may be the first lightbulb moment in policymakers’ minds.

Still, this approach requires a continuous flow of cash into the rakyat’s pockets for it to be impactful to growth and, subsequently, inflation and the OPR. Although it is easy to implement, it is difficult to discontinue for political reasons.

Spend on the supply side of the economy? It will take more than a fiscal cycle, thus the impact is negligible in the short term. Besides, it could even exacerbate things further if import substitution policies are not in place or implemented effectively.

Secondly, is it possible to stimulate the economy on a large scale without being in a crisis, and if so, how much can we spend?

The statutory debt-to-gdp ratio shot up from 57.6% in 2022 to 62.1% in 2023, which is close to the debt ceiling of 65%.

There is not much elbow room anymore unless the government decides to increase the ceiling to spend more. It can be politically challenging considering the vitriol surrounding debt accumulation over recent years.

And lastly, should we do it? The government seems committed to controlling the fiscal deficit, so it is uncertain whether they have the appetite to spend more.

Considering that the currency is not on a free fall as mentioned earlier, fiscal policy, and not monetary policy, should do most of the heavy lifting in improving the ringgit’s value.

Besides, the eventual US rate cut will bring the ringgit back to a more comfortable level as the local note is more elastic to the changes in the US dollar lately.

However, this does not mean that we do nothing even if things get better eventually.

Currency has become a commodity that is influenced by both internal and external demand and supply. If a currency’s equilibrium can be determined by the external demand, interest rates and return on risk-free assets of other countries will influence the ringgit’s value, too. This is why the interest rate is often coined as the price of money.

It is important to consider the consequences of our decisions and not make rash choices that only protect the interests of a few. A quick fix to the economy and the ringgit, in any shape and form, is no guarantee that things will be different in the long term.

Wisdom, and not knowledge, is more important in this context. If we must take a stance and decide now, the biggest question we should ask ourselves is whether Malaysia is in a crisis or not.

But first, who has the authority to define the word “crisis” anyway?