On Wednesday, 28 June, I had the privilege of hosting a discussion featuring the founder of RinggitPlus Hann Liew and Economist Sani Hamid.

Our conversation focused on the current declining ringgit, which has fallen almost 6% against the US dollar and over 10.5% against the pound sterling on a year-to-date basis.

Comparisons to our Southeast Asian counterparts show that our ringgit hasn't fared well either. According to a recent report by MIDF, the ringgit stands as the second-worst-performing currency in Asia, trailing only behind the Japanese yen.

For those who missed the insightful session, the full replay is now available on Spotify. Listen to it here.

Scroll down for a written summary of the session.

Shoutout to all Learners and Gatherers! Thank you for all your support.

Get early access to our newsletter and miss nothing from the markets. Join our journey towards financial literacy today.

Our private announcement group will keep you updated with market movers and urgent matters. For only $1/month, you'll receive our weekly newsletter every Sunday night and daily notifications on important events, some with detailed thoughts from economist Mr. Sani Hamid and RinggitPlus founder Hann Liew.

✅ No commitments.

✅ Cancel anytime.

✅ Zero ads, zero shills.

The depreciation of the ringgit has undoubtedly caused considerable concern among Malaysians. How does this decline affect citizens, apart from seeing import prices go up?

Currencies are influenced by supply and demand, and the impact of a fluctuating currency largely depends on individual consumption habits.

If you frequently buy foreign goods, you will experience higher prices.

On the other hand, if you’re an exporter, a weaker ringgit will make your goods more competitive in the global market, thereby being beneficial to Malaysia’s economy.

The ringgit’s strength also holds a certain level of pride and reflects Malaysia's economy to a certain extent. A declining ringgit could potentially undermine confidence in the local currency.

What are the reasons for this decline? Why is the ringgit experiencing such a significant drop not only against the US dollar but also against other major currencies?

Sani: Malaysia is far from a currency crisis, so we need to stop panicking!

While it is true that the local note has experienced a decline of 5.60% against the US dollar, the depreciation is minor compared to other currencies facing significant devaluations.

The Turkish Lira, Lebanese pound, and Argentine Peso, for example, have fallen over 50% to 100% in the course of just a few months due to unsound policies enacted by the governments.

There are many reasons for the ringgit’s decline. You can’t just look at a currency pair and deduce that the ringgit is weak. It’s important to consider the strength of the US dollar as well, which over the past year has rallied against many major currencies.

There is also net foreign selling in the local equity market, with funds shifting their focus from South Asia to North Asia. MIDF’s weekly June report indicates that foreigners have been consistently selling off their investments for eleven consecutive weeks.

The remaining decline in the ringgit can be attributed primarily to political uncertainty.

Over the past five years, Malaysia has had four different prime ministers. The current government is a coalition, which creates uncertainty among investors regarding the stability of our nation and raising the question of why investors should even hold the ringgit in their portfolios.

Many people are attributing the ringgit’s weakness to the lack of action from Bank Negara Malaysia. What measures could BNM undertake in this situation?

As the central bank of Malaysia, Bank Negara Malaysia (BNM) has a crucial role in ensuring the stability of the financial markets and the ringgit. The central bank's influence on the ringgit is primarily limited to the short term. Here are several measures that BNM can undertake:

i. FX Operations: BNM can utilize its reserves to maintain the stability of the ringgit by selling foreign currencies and buying the local currency, thus defending its value.

ii. Setting the local interest rate: BNM sets the Overnight Policy Rate (OPR), which affects borrowing costs and interest rates. By increasing the OPR, it can attract demand for the ringgit as higher interest rates make holding the currency more appealing, ultimately strengthening its value.

In regards to the recent weakness, BNM has made it clear that their purpose is to reduce the ringgit’s volatility – there’s little they can do to change the direction of the currency. The long term strength will need to come from effective government fiscal policies and economic development.

Raising the OPR by a fair margin in order to “catch up” with other central banks and strengthen the ringgit is definitely something to consider. But wouldn't such OPR hikes further burden citizens, as what we are currently witnessing?

The purpose of OPR is not to strengthen/weaken the currency at all, contrary to popular belief. It is to ensure price stability (ie. inflation).

The hikes are meant to tame price pressures and were never about the ringgit.

As Malaysia’s inflation has moderated steadily to 2.8% in May, there’s really no reason for BNM to hike rates aggressively, as it will only add more burden to citizens.

*Remember: every 25 bps hike represents an RM35/month increase in your floating loan principal of RM250,000. New loans will also get affected.

BNM recently announced its intention to intervene in the currency market to halt the depreciation of the ringgit. How effective is this approach? Is it possible for the ringgit to strengthen and reach the RM4.44 range?

On a day-to-day basis, the central bank uses their reserve to ensure that the ringgit’s fluctuations remain manageable. It is impossible for BNM to change the long-term trajectory of the ringgit. This would need to come from fiscal policies and the country’s growth, as previously mentioned.

Everybody needs to move away from the fact that a weaker ringgit is detrimental. If it’s depreciating at the rate of the Turkish Lira or Lebanese Pound, then we should be worried.

A moderately weaker ringgit, in fact, can enhance our export competitiveness, which is ultimately good for the economy.

What should the government do to retain interest in the ringgit?

Politicians need to shift their focus on the ringgit’s strength and instead concentrate on more significant indicators such as GDP growth. By cultivating a robust and vibrant economy that outpaces growth in other emerging markets, the ringgit will naturally benefit.

Maintaining a disciplined and well-controlled fiscal position is also essential. We need to be prudent in financial management and refrain from excessive borrowing to finance the country's expenses.

To foster a dynamic economy, we should encourage foreign investment and promote a highly tradable ringgit. By creating an environment that welcomes foreign investors and facilitates easy trading of the currency, we can attract capital and enhance economic activity.

Now that we’ve talked about the government, let’s bring it to a more personal perspective, Are there any steps that Malaysians can take to preserve their purchasing power?

As Malaysians, it is natural for us to have a skew towards holding ringgit-denominated assets. This is why diversification is crucial, as it can help to mitigate risks of the ringgit’s decline.

This not only includes having multiple stocks and bonds, but currencies as well. Whether it’s SGD, USD, etc, you need to have some assets that are not necessarily in the ringgit, with the percentage depending on your risk profile.

Avoid keeping all your money in a current account that earns zero interest. Bear in mind that your funds depreciating at an annual rate of 2-4% due to inflation.

Preserving your purchasing power by investing in low-risk assets such as money market funds (e.g., TnG, Versa) and fixed deposits. Aim to earn a rate of return higher than the current Overnight Policy Rate (OPR) set by the central bank at 3.0%.

*My personal choices are Versa (4.0% pa), TnG GO+ (3.50% pa), and TnG GOInvest (3.95% pa).

Click on this link for a detailed breakdown on each of these products.

The full replay of the discussion is available on Spotify. Be sure to give it a listen!

That’s all for this week’s newsletter!

*This issue was written at 12 PM on 2nd July 2023 and completed at 5.30 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!

DISCLAIMER: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice.