Policy for a stronger ringgit – The Star Online

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IT seems there is a trampoline of late any time the ringgit tries to strengthen below the RM3 to the US$1 level.

Since the removal of the peg against the US dollar, the ringgit’s highest point against the dollar was at RM2.93 back in July 2011. Since then, the ringgit has been generally trading between a band of RM3 and RM3.20 against the dollar.

For the whole of 2012, the ringgit only went below the RM3 mark once, and that was on Feb 29 when it traded at RM2.99 against the greenback.

It traded at RM3.10 against the dollar yesterday, and the ringgit has turned from one of the better performing currencies in Asia against the dollar at the beginning of the year to one of the worst year to date.

Why is it that for a country that has one of the best economic growth rates in South-East Asia with foreign investments picking up and one where commodities and manufacturing serve as a backbone to the economy sees the ringgit swoon everytime it tries to breach the RM3 mark?

Maybe it’s because the increasing domestic investments means for imports for machinery and equipment to facilitate the expansion by local companies?

Maybe a combinations of factors are at work here.

The Statistics Department released data yesterday that showed exports rose 0.6% last year to RM702.2bil while imports climbed 5.9% to RM607.4bil. Imports climbed strongly as investments and consumption activity in the country picked up pace. Strong imports are generally a sign of a robust economic activity and it’s not an area of concern when that happens.

For 2012, industrial production rose 4.2% and odds are that gross domestic product (GDP) growth should come in at above the upper end of the official forecast at 5%.

But the growth rates of exports and industrial production for December was weaker than consensus estimates but monthly swings rarely influence currency rates that much unless they are dramatic.

Maybe one indicator for the weakening ringgit has to do with the stock market. The benchmark FTSE Bursa Malaysia KL Composite Index is the worst performing index in Asia so far this year, dropping 5.2% this year.

Interestingly, the other currency that has seen weakness has been the South Korean won and the Kospi is the second worst performing market this year in Asia with a fall of 4.8% this year.

Foreign funds have been net buyers of equities in Malaysia so far this year and that rules out the theory of portfolio fund outflows weakening the ringgit. Maybe Malaysians are hedging their bets ahead of the election by repatriating their cash out of the country but one other reason why the ringgit has seen such a fall in such a short time may be down to a the move by Japan.

The yen has been allowed to fall against the dollar in a bid to reflate the Japanese economy and that has put pressure on the won as products being exported by South Korea are basically in direct competition with Japan.

For Malaysia, as one of the larger trading nations in the world, a weaker ringgit could help exports that grew meagrely in 2012 and it’s interesting to see just what happens next with the other currencies in Asia that are vying for the same export markets as Malaysia and South Korea.

The weaker ringgit will benefit exporters but would hurt consumption a little should goods become more expensive.

But as the economy has aspirations for being a high-income nation by 2020, it’s only natural for the ringgit to make its climb upwards eventually. A stronger ringgit will force companies to modernise and become more competitive.

It has to be a gradual process but ultimately the aim should be for a policy that advocates a stronger ringgit instead of one that facilitates Malaysia to remain a nut and bolt factory to the world.

Acting business features editor Jagdev Singh Sidhu wonders when will the ringgit climb back to RM2.50 against the dollar where it was for chunks of the 1990s.