Low ringgit could be just what

Malaysias economy needs

A currency trader holds up Malaysian ringgit notes at a currency exchange store in Kuala Lumpur. Pic: AP.

By Murray Hunter Jul 16, 2015

The Malaysian ringgit has taken a battering over the last few months, especially
relative to some of the high performing currencies in the region, like the Thai baht. The
Malaysian ringgit is now at a nine-year low against the US dollar, just recently ducking
under the psychological RM3.80 mark.
This new ringgit low has come at a time when a number of potential scandals such as
the 1Malaysia Development Berhad (1MDB) furore, where the Sarawak Report and
Wall Street Journal (WSJ) has alleged that Prime Minister Najib Tun Abdul Razak
received $700 million into his personal bank accounts, are threatening Government.
These accusations are part of an all out brawl going on between former Prime Minister
Tun Mahathir and the current prime minister for power and control of the dominant
governing party UMNO, something that has been common in Malaysian politics. As

such, it is not the underlying reason why the ringgit is so low at the moment, contrary
to what most pundits are saying.
Beyond these psychological factors that many see as destabilizing the currency are
fundamentals within the Malaysian economy that are behind the fall.
As we have seen, global oil prices have been falling since the 3rd quarter of 2014. Oil
and gas represents 30 percent of the Malaysian Governments revenue, and 20
percent of the countrys exports. In addition palm oil and rubber prices are low, where
demand for rubber has weakened through a slowdown in China growth.
Malaysia is thus in the grips of a fall in export growth (20.2 percent in April and 15.6
percent in May 2015). Where household debt is currently 88 percent of GDP, and
government spending is being curtailed, contractions in the economy are to be
expected. This can be seen in the decline of imports in May by 16.0 percent, and a
weaker-than-forecast production output last month. The decline in exports is forecast
to continue over the rest of the year.
Due to the background environment of the Greek debt crisis, debt laden state
investment in Malaysia doesnt look too good to ratings agencies at the moment. This
is probably the most important factor working against the ringgit at present, and there
doesnt seem to be a short term solution.
Many pundits forecast doom and gloom, even talking about re-pegging the ringgit
against the US dollar, and re-introducing exchange controls, like then Prime Minister
Tun Mahathir did during the Asian Financial Crisis back in 1997, at RM3.0 to the US
dollar.
However, todays situation is very different from the Asian Financial Crisis. There are
seemingly not the same levels of speculation that were present back in Mahathirs
time, so any pegging of the ringgit to the US dollar would probably just bring
unnecessary panic, and may even incite much more capital flight.
There is no evidence that the banking sector is in danger of collapsing, and the
fundamentals of Bursa Malaysia appear sound.
Some of the trouble is also external and beyond the control of Bank Negara and the
Malaysian Government, with the U.S. Federal Reserve bank lifting interest rates at
present.
As such, the ringgit appears to be undervalued at present, which may not be a bad
thing. An undervalued RMB helped China to become the factory of the world.
The low ringgit is signaling that the Malaysian economy is too narrow and dependent
on commodities such as oil and gas, palm oil, rubber, electronic goods, etc. Much

more diversity is needed.

A tractor hulls a load of oil palm bunches at a plantation in Tawau, Malaysia. Pic: AP.

There is no doubt that the Malaysian Government is trying to manage its budget.
However, relying on the windfall of GST payments which will start to come in next
month will not be enough. The Government will have to cut spending drastically, but
luckily there is room to do that without hurting services to the people. It will just take
the will to look hard at much of the wasted spending that is going on within the
Government service today.
The low ringgit provides an enormous opportunity to revitalize the Malaysian economy.
First the Government needs to look hard at import replacement, and, second, develop
new innovative goods and services for export.
Agriculture and small scale manufacturing are almost stagnant at present and require
a much needed shot in the arm. There are many products that can be produced that
can reduce demand for imports and be exported. Local resources are available, and
only need to be deployed in aid of revitalizing agricultural production. New sources of
innovation and skills are needed in the SME sector to transform it into a major pillar of
the Malaysian economy.
When these new products filter through, the impact of inflation from the lower ringgit
and introduction of the GST can be lessened dramatically.
Revitalizing agriculture and small scale manufacturing are the best tools to fight
inflation and unemployment, which will be two major issues for the Government to face
later in the year.
If this can be quickly tackled through raising levels of local enterprise and innovation,
more employment can be created and the impacts of imported inflation minimized.

This may be best achieved through abandoning the current approach to economic
management at the aggregate level and start looking at Malaysia as a series of
smaller regional economies. One policy solution doesnt fit all and different stimulus
initiatives are required in different places.
New paradigms are needed, where the top down development approaches, could be
replaced with participatory approaches where real commitment can be developed at
the grassroots level. Lack of commitment by infrastructure policy implementers has
been a factor of failure for a long time in Malaysia. Instead of looking at biotechnology
hubs, and Multi-Media corridors, look at what small scale appropriate technologies can
do for the economy.
This is a big dream, but Malaysia needs a big dream to reposition the economy
through much needed emphasis on diversity.
The low ringgit provides this opportunity.