Economists: Ringgit slide effect on daily life minimal, but best to cut spending

 

The fall of the ringgit against the US dollar is unlikely to impact the lives of the ordinary rakyat in a major way but it is advisable for the people to explore supplementary income options or cut down on unnecessary spending, economists said.

Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong said the sliding ringgit may not affect the people’s spending power as much as one may perceive.

“It is no doubt that a weaker ringgit makes imported consumption goods more expensive. The question is, to what extent?

“Imported consumption goods account for only about 7.5 percent of total final consumption, leaving aside the fact that local distributors of imported consumer goods are likely to absorb part of the higher cost.

“So, while it is painful when the ringgit is sliding, it is certainly not unbearable,” Wong told Malaysiakini when contacted.

He was responding to the Malaysian ringgit ending at a new 24-year low against the greenback yesterday.

The trend affected other currencies worldwide as well, as a result of the substantial interest rate hike by the US Federal Reserve due to the persistently high inflation rate in the United States.

According to Wong, the cost impact of a weak ringgit remains to be seen, as the producer price index has been sliding in tandem with the weakening ringgit in the past couple of months.

The impact of the sliding ringgit can, however, be seen in making industrial upgrading difficult as the cost of imported capital goods and hiring foreign talents go up, he noted.

As the strengthening of the US is expected to continue for a while, Wong offered some tips for the rakyat to “weather the storm”.

“A strong dollar or a weak ringgit is not something we, as ordinary people, can overcome. Perhaps at an individual level, being more prudent in spending, being more mindful in saving, being more proactive in income earning, and being more ‘entrepreneurial’ in career development are some of the things we can do.”

Prepare for longer weak ringgit

According to Shankaran Nambiar, who is a senior research fellow at the Malaysian Institute of Economic Research, the US dollar is expected to continue strengthening at least until the end of this year.

“This is fuelled mostly by the aggressive stance taken by the Federal Reserve, but the US dollar could strengthen for other reasons going into 2023 - at least until the first half of the year, and that is likely to be the outcome of the continued Russia-Ukraine war.

“Amid global uncertainty, the US dollar and investments in the US may be seen as a safe haven. So, we will have to be prepared for a longer stretch of ringgit weakness,” he told Malaysiakini when contacted.

Nambiar said while the Malaysian economy has been performing “reasonably well” post Covid-19 pandemic, there are areas of concern.

“These include political and policy uncertainty, as well as uncertainty as to how the fiscal position will be handled. These concerns will weigh on the ringgit, to some extent,” he cautioned.

Nambiar further noted that inflationary pressures, coupled with the weak ringgit, have resulted in price increases, which in turn, has eroded purchasing power.

“There is not a lot that consumers can do to withstand the rising cost of living. We could avoid buying imported goods, but that is difficult since our vegetables, fertilisers, and building materials are imported.”

Not a crisis yet

Sunway University economics professor Yeah Kim Leng assured that while the fall in ringgit value signifies a decline in purchasing power, it is not necessarily associated with an economic, financial, or currency crisis such as the Asian Financial Crisis in 1998.

“Countries that adopt flexible exchange rates, as in the case of Malaysia, and most other market economies, will experience currency fluctuations that have twin-edged effects. Exporters gain while importers suffer higher costs. Foreign investors, meanwhile, find Malaysian assets cheap.

“The converse is true for Malaysians investing in foreign assets. As long as the currency slide is not the result of a structural or fundamental problem that eventually leads to a collapse of the market or economy, the exchange rate acts as a shock absorber and helps in restoring equilibrium in the economy,” Yeah told Malaysiakini when contacted.

He concurred that the impact of the strengthening US dollar/sliding ringgit will be muted in daily lives.

“For daily essentials where there is no substitute, such as bread and butter, or supplies that are mainly from overseas, such as premium milk and beverages, fruits and cereal, consumers will see prices creeping up.”

To cope with the situation, Yeah proposed having an income that is “high enough” to cope with rising inflation and higher prices of imported items, or using cheaper substitutes for imported goods.

“Low income or wage earners will likely need to explore supplementary income sources. Otherwise, consumers will have to consider ‘expenditure-switching’, that is, to change the composition of spending on locally produced and imported goods and use cheaper substitutes.

“They can also consider cutting back non-essential spending or delaying purchases of big-ticket items. From a national perspective, however, we need to be mindful of the ‘paradox of thrift’, given that ‘when the spending stops, the economy grinds to a halt’. What is needed is prudent spending according to one’s income and needs.” - Mkini