EVEN THE RINGGIT IS EMBARRASSED BY NAJIB'S DONATION & 1MDB

THE ringgit climbed around 0.7 per cent against the US dollar last Thursday, to RM4.0303 per US dollar. However, the ringgit still weakened against the Singapore dollar (which had strengthened against the US dollar), culminating in an exchange rate of RM3.0057 per Singdollar. While this little gain is not much to crow about right now, plenty of signs suggest the ringgit may be on the way back up. One major source of downward pressure – oil prices – seems to be on the rebound.

What happened to the ringgit anyway?

The ringgit has been struggling since 1st December 2014, when it posted a sudden two day depreciation of 2.4 per cent against the US dollar. By 9th June 2015, the ringgit was at RM2.77 per Singdollar, driving Singaporeans into long queues at the moneychanger.

After a few ups and downs, thing got worse after that, and the ringgit was identified as Asia’s worst performing currency. In June 2015, Fitch even threatened to downgrade the currency (luckily for Malaysia it never happened, with the ringgit being graded as “stable” in July 2015).

As of last Thursday, even a slight recovery of the ringgit was good news. The ringgit’s woes come from a variety of factors, all of which seem to have struck at around the same time:

Falling oil prices

The 1MDB scandal

Rising interest rates in the US

Malaysia may be willing to accept the weak ringgit

1. Falling oil prices

According to Prime Minister Najib Razak, Malaysia loses RM 450 million for every US$1 drop in oil prices. An impressive number, almost 1/6th of the amount they seem to lose when he gets a donation. Due to Saudi Arabia fighting a price war against American shale oil companies, oil prices began falling in 2014. The lower revenues from oil sales placed significant downward pressure on the ringgit.

2. The 1MDB scandal

When the 1MDB scandal erupted, it was revealed that the state investment fund had chalked up about US$11 billion worth of debt, and had little to show for it. This drove the ringgit even lower, and may have been the catalyst for worries about the Fitch downgrade.

While it is not the primary factor in driving down the ringgit, the ongoing scandal certainly doesn’t help in boosting investor confidence.

3. Rising interest rates in the US

Prior to March 2016, it was expected that the United Stated Federal Reserve would impose interest rate hikes four times throughout the year. This would raise the strength of the US dollar, which poses a problem for commodities exporters such as Malaysia. In fact, CNBC highlighted the ringgit as one of the main currencies that would be impacted by the rate hike.

4. Malaysia may be willing to accept the weak ringgit

Why doesn’t Malaysia do something about the falling ringgit? Well they could do a lot more, but there may be strategic reasons not to.

Following China’s devaulation of the yuan, several other currencies in South East Asia followed suit. A weakening yuan means Chinese exports become cheaper and more competitive, so other states in the region follow suit (otherwise businesses start to buy from China instead of them). For the same reason, Malaysia may not want the ringgit to be too strong right now.

In addition, Malaysia has been steadily diversifying its economy away from oil since 2010. Oil accounted for some 10.8 per cent of Malaysia’s GDP back in 2010, but this figure declined to under 9.9 per cent by 2015. By allowing the Malaysian ringgit to weaken, Malaysia improves the competitiveness of its other industries. This offsets the weakness in oil, and seems to go along with their long term economic strategy anyway.

For a more practical illustration, consider how Singaporeans are going to Malaysia and spending a lot more money there because the ringgit is so low.

But a rebound may be on the cards

Oil prices have made a recovery, at present reaching US$52 per barrel. This is on the back of news that US oil production fell, declining by 250,000 barrels per day in May this year. In addition, US stockpiles of crude oil fell by 3.1 million barrels in the first week of this month. The lower the supply of oil, the higher the price will rise.

Also helping oil prices to recover are…uh, terrorists. The Niger Delta Avengers, despite sounding like a Saturday morning cartoon, are a dangerous militant group that wants to fight Western oil companies. They’ve been blowing up so many oil wells that Nigeria, an oil exporter, is now at its lowest oil production rate in 20 years. This has helped send oil prices to a high, so the looks on their terrorist faces are nothing short of hilarious.

And while I doubt the Niger Delta Avengers even know what a ringgit is, they’ve indirectly helped it along.

Also helpful is the announcement, by the United States Federal Reserve, that only two – and not four – interest rate hikes will take place. This lowers the strength of the US dollar, thus allowing the ringgit to appreciate against it. It also means investors will be more willing to take risks, which generally bodes well for emerging market currencies.

American Presidential candidate and part-time human Donald Trump is also in favour of maintaining low interest rates. In the event that he wins, It’s likely that his policy of low interest rates will help the ringgit, shortly before we all perish in a nuclear fireball. - http://themiddleground.sg