Ringgit and the Malaysian economy

During the Asian financial crisis of 97/98, the Malaysian Ringgit (MYR) fell sharply from 2.50 to 4.57. To mediate the fall, the government at the time decided to peg Ringgit at RM3.80. Pegging has invariably solved the Ringgit from dropping further in value however it has also stagnated its long term value. Meaning if the market is good, Ringgit will not increase in value and similarly if the market is weak Ringgit is not affected either.

In 2005, the government decided to unpegg the Ringgit and let it float, hence its performance has gone up and down based on the market sentiment ever since. The recent drop in petroleum and commodity prices has affected the Malaysian economy and making things worst is the dwindling corruption index of the country which further sways investor’s confidence.

Bank Negara Malaysia (BNM) has always been in the forefront of protecting and cushioning Ringgit from falling drastically. One of the approach used was to buy the Ringgit using their own foreign reserves to increase its demand.

The manufacturing sector is perhaps the most affected industry whenever the Ringgit falls. As Malaysia pushed for industrialization in the 80’s many manufacturing plants (particularly electronic and engineering industries) was setup here to leverage from our cheap and knowledgeable workforce aside from the incentive and infrastructure development provided by the government.However so, most of the components used in the manufacturing are sourced from outside, thus the drop in Ringgit would mean an increase in production cost. To cope with the increasing cost, companies would first reduce their operational cost by shrinking the workforce. When people are out of job, this contributes to a weaker Malaysian economy and soon enough companies would shut down and go elsewhere where the currency is favorable for business.

The drop in Ringgit may not be favorable for imports but is certainly is good for export. Hence that is one of the reason why Ringgit was pegged to RM3.80 against the dollar as this amount seem to be a compromise for both import and export. So although this strategy of pegging worked in the 97/98 crisis, the present government is not inclined to use the same approach to solve the current depreciation of Ringgit. Instead the government via Bank Negara Malaysia is resorting to other strategies that will be discussed in later posts.

As of the writing of this post, the Ringgit stood at RM4.43 against the US dollar.


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