Although the ringgit had depreciated much more than other currencies, the situation was still under control, said senior lecturer at Universiti Utara Malaysia’s School of International Studies Dr Nurhaizal Azam Arif, adding that the environment was different in 1997 when the actions of currency speculators had caused the ringgit to tumble.
He said the nation’s economic fundamentals were still at healthy levels and, furthermore, in June international rating agency Fitch Ratings had upgraded the outlook of Malaysia’s sovereign rating to “stable” from “negative” and affirmed its long-term foreign currency issuer default rating at A- and local currency at A.
“This year, Malaysia was hit by falling fuel prices, the IMDB (1Malaysia Development Bhd) crisis, China’s weaker economy and rumours of a hike in interest rates by the US Federal Reserve. This is why the ringgit performed badly in comparison to other Asian currencies.
“The fall in fuel prices resulted in lower oil- and gas-based incomes while China’s sluggish economy has caused many investors to take their money to the US to take advantage of a possible rate hike there,” he told Bernama.
Pros and cons of pegging the ringgit
During Malaysia’s Economic Update 2015 forum on “Outside-In-Perspective: Economic Outlook for Malaysia”, which was held last year, Performance Management and Delivery Unit Chief Executive Officer Idris Jala said between January 1 and September 18 this year, the ringgit had declined 16.7 per cent against the greenback.
However, he added, Malaysia’s economic health was robust in comparison with many other peer nations and that its key economic indicators continued to underline the country’s solid fundamentals.
Fitch Ratings as well as Standard and Poor’s Ratings Services and Moody’s Investors Service, which had also participated in the forum, concluded that the country’s fundamentals, including the financials, were still good although there were other issues that needed to be addressed.
Last month, Prime Minister Najib Razak said the government would not introduce capital controls nor peg the ringgit to the US Dollar as Malaysia’s economic fundamentals remained sound as reflected in the real Gross Domestic Product (GDP) growth of 4.9 per cent in the second quarter of 2015.
Nurhaizal Azam, meanwhile, explained that the exchange rate regime consisted of two types – fixed and floating. The pegging mechanism, he said came under the fixed exchange rate regime. If Bank Negara Malaysia (BNM) pegs the ringgit against the US Dollar, the central bank will maintain the value of the ringgit at the rate so pegged (or fixed) by selling and purchasing currencies in the foreign exchange market.
In the floating exchange rate regime, the value of the currency is determined by the private market through supply and demand.
According to Nurhaizal Azam, who also lectures in international business, pegging the ringgit would have its own advantages and disadvantages.
A main advantage would be the ringgit’s stabilisation, which would put a stop to currency speculation activities.
“The spin-offs from this will include stabilisation of prices (of goods and services) which will benefit consumers. It will also be easier to boost international trade and foreign investments because investors are no longer exposed to the ringgit’s fluctuation risk,” he said.
Meanwhile, a major disadvantage of pegging the ringgit was that Bank Negara Malaysia (BNM) would have to undertake more costly and tedious exercises to ensure that the value of the nation’s currency remained at the fixed rate.
“You can’t just peg a currency and leave it to its own devices. BNM will be compelled to shore up its foreign reserves to ensure that it has enough reserves to sell or buy the ringgit should its value appreciate or decline in the market.
These exercises effectively keep the market value of the ringgit to the pegged exchange rate.
“There will be times when it is difficult for the central bank to control the ringgit and this may result in negative implications, like what happened in Thailand in 1997 when it pegged the Baht. Eventually, the Thai central bank had to abandon the peg and float the baht because it couldn’t contain the currency’s decline, causing panic and triggering the Asian financial crisis,” he explained.
Although a pegged ringgit could curb inflationary pressure, he said the effect would only be temporary because even a stable ringgit could trigger inflation as imports and spending rise.
Encourage FDIs
While Nurhaizal Azam firmly supports the Malaysian government’s move to continue to subject the ringgit to the floating exchange regime, he said there were various initiatives the government and the people could take to help boost the value of the ringgit.
He said the government and local investment agencies should step up efforts to promote Malaysia as an attractive destination for foreign direct investments (FDIs), based on its growing economy and domestic demand.
He said besides efforts to enhance tourism revenue, the government should also focus on increasing the foreign student population in Malaysia to boost the inflow of foreign exchange. Foreign students, he added, could do their bit to strengthen the ringgit as they stayed in the country for a prolonged period and were consistent spenders.
“Malaysia has to offer something very extraordinary in order to compete with regional partners like Thailand, Vietnam and Indonesia, which are currently the favoured destinations in Asean for FDIs. Employment costs may be higher in Malaysia but if it can prove that it has an edge over the others in terms of productivity, skills, talent, attitude and working spirit, then it will succeed in attracting investors.
“More foreign investments mean higher inflow of foreign exchange and a firmer ringgit. An additional bonus will be the creation of new job opportunities. Making Malaysia more attractive to foreign investors is the joint responsibility of all the people, who must go all out to make it happen,” he said.
Curb ringgit outflow
Measures to curb the ringgit’s outflow include encouraging Malaysian travellers to spend their vacations at local destinations rather than abroad, said Nurhaizal Azam.
He said the government should also place restrictions on the intake of foreign labour as, currently, the level of remittances made by Malaysia’s foreign workforce to their countries of origin was very high.
Nurhaizal Azam added that suppliers of imported goods and services should look for local substitutes which would, in turn, help spur the growth of local industries.
He said whether the ringgit was in declining or strengthening mode, the government has the capacity to formulate and implement appropriate policies and strategies to rectify the situation.
“If the ringgit slide is in line with that of other Asian/Asean currencies, the existing floating exchange rate regime can still be maintained,” he said, adding that if the ringgit was more badly affected than neighbouring currencies, the government and BNM would have to review their policies as there could be other factors influencing the ringgit’s performance.
“If there are irregularities, then some form of (capital) control will have to be enforced. There might be a need to peg (the ringgit) or control the outflow,” he said.
– BERNAMA
No comments:
Post a Comment