What are the main reasons for the ringgit's weak performance for the past year?
The situation is complex and the result of both international and domestic factors. The most important international factors are:
International geopolitical uncertainty: in moments of crisis, the USD (and locally the SGD) are preferred reserves of value and therefore capitals flow to buy them.
Higher rates: this is not in general a positive news for the US; but the massive and toxic money creation that the US – and Singapore – deployed during the Great Lockdowns generated inflation (as it had to be expected: CME warned about it in May 2021). Higher inflation forced the FED into prolonged restrictive monetary policy and now those higher rates are attracting capitals.
China. China’s suicidal lockdown policy was not just harmful in itself but it was also a vehicle to demonstrate the contradictions of China’s growth model. The weak performances of the Chinese economy – again, to be expected – are weighing negatively on trading partners like Malaysia.
This is reflected in the bad trade performances recorded by Malaysia. This brings to the domestic causes:
Disappointing GDP performances: in 2023, the government sector grew at a pace double than the private sector, showing all the contradictions of the Malaysian economy, which is still driven by consumptions and by the heavy hand of the government, therefore showcasing an unsustainable model of growth.
Inconsistent economic policy. The government verbally commits to reforms to attract investments and rationalize expenditures, but these reforms are not happening and rather the government keeps on focusing on racial privileges, price controls, employment restrictions and government-led supply of basic products.
What measures or structural changes the government/central bank could/should take?
With regard to the government: change radically pace in economic policy. I do not see instead room for monetary policy at the moment: with low inflation and weak GDP performances, higher rates may not be a wise move.
Following Nobel Laurate F.A. von Hayek, I would suggest ASEAN countries to “bind themselves mutually not to place any restrictions on the free use within their territories of one another’s – or any other – currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep book”.
The reason behind such a proposal is that – in a free currency system – people would refuse to use the national currency if it depreciates and therefore competition would push in the direction of value-stable currencies. “The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product”.
