17 Jul The Malaysian ringgit has been on a downward trend against the US dollar and Singapore dollar lately
KUALA LUMPUR: The Malaysian ringgit has been on a downward trend against the US dollar and Singapore dollar lately. The ringgit’s performance against the greenback had declined 0.7 per cent in the first quarter of 2022, which Malaysia’s central bank Bank Negara Malaysia (BNM) stated was broadly in line with the movement of other regional currencies. The ringgit had further weakened against the US dollar since March, from trading below RM4.20 to hitting RM4.36 in early May. On May 19, the ringgit slumped past RM4. 40 against a strengthening dollar, as the market anticipated rate hikes in the United States to combat inflation, The ringgit also depreciated to a record low against the Singdollar on May 24, touching RM3.2068, according to data from the Wall Street Journal. CNA spoke to analysts on the reasons behind the ringgit’s depreciation, what it means for the Malaysian economy and factors affecting its value. WHY IS THE RINGGIT SO WEAK? Sunway University economics professor Yeah Kim Leng explained that the Singdollar had reached this new height as the country’s monetary policy was based on managing the exchange rate, and allowing interest rates to adjust freely with international rates. "Singapore’s monetary authority is expected to appreciate its currency to counter the rise in imported inflation. "As Malaysia’s interest rate adjustment is likely to be more gradual than international rates, the narrowing interest rate differential will be reflected in a weakening ringgit, " Prof Yeah explained to CNA. Mr Hafidzi Razali, a senior analyst with strategic advisory firm Bower Group Asia, said the weakening of the ringgit to the US dollar was in part due to investors factoring in larger rate hikes by the US Federal Reserve, more so with inflation in the US reaching as high as 8.5 per cent recently. Higher interest rates would reduce the amount of money in circulation and decrease inflation, as loans become more expensive while deposits give better yields. "Investors would favour the US dollar when the interest rates are hiked for higher yields, " Mr Hafidzi explained. He added that a weakening Chinese yuan against the US dollar had also indirectly affected the ringgit, given Malaysia’s strong trade linkages to China. WHAT DOES IT MEAN FOR MALAYSIA’S ECONOMY? Malaysia’s weakened currency would result in higher import prices, burdening both consumers and importers, the experts said. "Imports of intermediate and capital goods will be more expensive, raising production costs while slowing down capital investment and industrial upgrading. " Prof Yeah said. Malaysian borrowers who had taken out foreign currency loans would also find their debt servicing burden increased due to the currency depreciation, he pointed out. This means they have to convert more ringgit into US dollars to pay the same amount of loan instalments. Mr Hafidzi pointed out that the increased costs of imports would also hit Malaysia in terms of necessities such as food, in which the country is a net importer. "The impact of both weaker ringgit and higher inflation may limit private consumption, as consumers’ pending power is reduced. "If it remains prolonged, this may impact the private consumption component for Malaysia’s gross domestic product (GDP) and impact the country’s economic growth percentage, " he explained. One silver lining, Prof Yeah explained, was that foreign investors with a stronger home currency would now find it attractive to increase their imports from Malaysia, or invest or acquire assets here. Source: https://www.channelnewsasia.com/asia/cna-explains-ringgit-weak-economy-us-dollar- singapore-dollar-2706766 Based on the article, answer the following questions: ii. Using IS-LM framework, demonstrates the impact of depreciating ringgit on output and interest rate.
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