BNM’s hands tied in stemming ringgit’s slide, say economists

 

The ringgit’s decline versus the US dollar and other major currencies won’t be solved simply by interest rate adjustments, say economists.

KUALA LUMPUR: The ringgit’s worrying decline is caused by structural weaknesses in Malaysia’s economy, and will not be simply solved by interest rate adjustments, according to two economists.

They said that while Bank Negara Malaysia (BNM) can employ monetary policy tools, it is actually limited in terms of its capacity to support the beleaguered local currency.

“BNM has a role to play, and they have their mandate, but there are limitations as well,” Universiti Kebangsaan Malaysia economics professor Noor Azlan Ghazali said during a discussion titled “Malaysia at Crossroads” at the UOB Asset Management Mid-year 2023 Outlook Forum today.

“We are putting too much (emphasis) on the central bank, because if it is a structural matter, the answer (lies) in Putrajaya, and not in BNM,” he said, alluding to the need for government leaders to have the political will to deal with issues such as the nation’s ballooning debt.

“If we look at the international reserves, are we crossing below US$100 billion soon? Things are not looking good.”

Malaysia’s international reserves stood at US$113 billion as at June 15.

Concurring with Noor Azlan, United Overseas Bank senior economist Julia Goh said there’s only so much BNM can do.

“We cannot always be obsessed with the spot level of where the ringgit is (versus) the US dollar. Our house view is that in the next six months, the US dollar strength may start to abate,” she said.

She added that if China’s economy recovers, this will see the renminbi start improving. “It will have a positive side in terms of spillover to the ringgit,” she added.

Long-term perspective needed

Noor Azlan also said many people are focusing on the day-to-day fluctuation of the ringgit, but not many are looking at it from a year-to-year or period-to-period perspective.

He broke down the ringgit’s depreciation into two phases since Malaysia stopped pegging the local currency to the US dollar at 3.8000 in 2005.

“The USD-MYR pair has been hovering within the first band of around 3.8000 up to 2015, before it moved to the next band, fluctuating between 3.8000 and 4.6000 (currently).

“When you see the shift in the band, that is likely more of a structural problem. Are we going to (an even higher) third band?” he asked.

Noor Azlan also said everyone is talking about the US Federal Reserve, but no one is talking about whether Malaysia is still there in terms of being a “preferred investment destination”.

The International Institute for Management Development (IMD) revealed in its 2023 World Competitiveness report that Malaysia climbed five spots to 27th place.

According to IMD, the improvements were mainly backed by the country’s economic recovery, investment growth and bright spots in exchange rate stability, and the employment market.

“Although we did improve (to 27th place), we are still far off from where we were before,” Noor Azlan said, noting that between 2010 and 2016, Malaysia was in the range of 10 to 15. - FMT