Undervalue no more

to consumers by raising the selling prices of finished goods. In the aggregate economy, this would result in higher inflation.

Essentially, an undervalued currency makes an item cheaper than the intrinsic value of the product to the foreign buyer but at the cost of consumers at home and domestic firms that import.

For instance, China as a trading nation has been labelled as a currency manipulator – suppressing the price of its exports to make it more competitive – by the US. On the other end, this comes at the expense of Chinese consumers and enterprises that imports at an expensive price.

The exchange rate level, if not at market equilibrium, is akin to transferring economic surplus from one party to another.

Malaysia remains dependent on domestic private consumption for its gross domestic product (GDP) – private consumption made up 55% of total GDP last year.

As much as exports and foreign direct investment contribute to our economy, the ultimate economic multiplier should trickle and translate into financial wellbeing of households. and pockets of geopolitical volatility across the world are among some of the key factors affecting the ringgit.

Perhaps international financial markets have been discounting Malaysia’s strong economic fundamentals too much. Keep in mind that Malaysia holds a higher sovereign credit rating (Moody’s: A3) level that some of our neighbouring countries (Indonesia at Baa3; Thailand at Baa1).

A resilient 4.2% GDP growth last year and strong commitment by the government to keep its spending deficit and debt in check are among the favourable macro developments international credit rating agencies have highlighted.

Unfortunately, it appears that larger forces are at play. Wild cards in the form of uncertain US Trump administration policies and Brexit negotiation fallout have spooked some international investors to chase safe haven assets. The impending US interest rate hike prospect also resulted in US asset yields appearing more favourable.

From a global macro perspective, PwC published a report “The World in 2050” on the future projections of national GDP in PPP terms between 2030 and 2050. By 2050, more than half of the top 10 economies will be emerging economies with China leading at about 20% of global GDP (US$58,499bil), followed by India at around 15% of global GDP (US$44,128bil), surpassing US to become the second largest economy.

In comparison to other emerging economies, Malaysia’s GDP growth in PPP terms is expected to climb up only three spots in the ranking list from 27th position in 2014 to 24th in 2050.

Therefore, we should take this as a wake up call. At a business as usual pace, Malaysia could only expect marginal improvement in its global economic position.

Our economy should continue to focus on its macro fundamentals and strengthen its resilience. When the dusts settle, strong economic growth and welcoming policies to foreign investors would be a catalyst to turn the ringgit undervaluation to our home advantage.

In comparison to other emerging economies, Malaysia’s GDP growth in PPP terms is expected to climb up only three spots in the ranking list from 27th position in 2014 to 24th in 2050. Therefore, we should take this as a wake up call. At a business as usual pace, Malaysia could only expect marginal improvement in its global economic position.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd