April 25, 2024
World Economy

Depreciating ringgit creating political problems for Malaysian government

On February 20, the value of the Malaysian ringgit fell to RM4.80 to the US dollar, or about 2 percent higher than the previous record low of RM4.885 in September 1998, during the Asian Financial Crisis. The Pakatan Harapan coalition government of Prime Minister Anwar Ibrahim is on the defensive, seeking to reassure both financial interests and the public that everything is under control.

Malaysian Prime Minister Anwar Ibrahim at the East Asia Summit at the Association of the Southeast Asian Nations Summit in Jakarta, Indonesia, Sept. 7, 2023 [AP Photo/Yasuyoshi Chiba]

The ringgit’s value has fallen sharply in the recent past, going from $US1 to RM4.24 on January 27, 2023, to RM4.80 on February 20 of this year, strengthening only slightly since then to RM4.75 on February 29. The implications of a persistently low ringgit or a further deterioration are serious due to the unmanageable political instability that could be unleashed.

One of the primary drivers for the ringgit’s deterioration is due to the fact that, while the US central bank, the Federal Reserve, increased the Federal Funds rate by one percent (100 basis points) in 2023, the Malaysian central bank, Bank Negara Malaysia (BNM), implemented just one increase of 25 basis points. Both base lending rates define the starting point for lending and borrowing throughout each economy.

Second Finance Minister Amir Hamzah Azizan noted that “the significant difference in interest rates with the US… encourages foreign investors to move capital out of the domestic market to a market that provides higher returns.” As money moves out of Malaysia, foreign currency is purchased by selling ringgit, driving the currency’s value down.

Furthermore, in 2023, Malaysia’s GDP grew at what is considered a disappointing 3.7 percent and there is increasing doubt the economy will achieve the forecast growth of 4 to 5 percent in 2024. The very high level of government debt, consistently high budget deficits, and the increasing risk of a default are also expected to have contributed to a negative view of the Malaysian economy and the ringgit’s decline.

Political analyst James Chin of the University of Tasmania noted that “once it hits RM5 per $US1… a lot of people will have lost confidence not only in the Anwar government but in its ability to deal with the economy… Malaysia is a trading nation so everything that it imports will automatically be much more expensive.” In this scenario, according to Dr Chin, import prices could rise by more than five percent.

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