Explainer: Why has the Malaysian ringgit stayed weak and what effect does it have on Singapore?

SINGAPORE, Sept 3 — An acute manpower shortage in coffee shops and restaurants in Johor Bahru has been reported in Malaysia as more workers choose to cross the Causeway to Singapore for work, according to The Malaysian Insight news website on Thursday.

While the Malaysian ringgit has appreciated slightly from its record low against the Singapore dollar in July, the weak currency has led some Malaysians to pursue work opportunities in Singapore in search of better pay.

In May this year, the Malaysian ringgit slumped to a then-low of 3.41 against the Singapore dollar. This placed a spotlight on the weakening Malaysian currency, and in July, the rate slid to a record low of 3.48 ringgit against the Singapore dollar.

As of Friday, it was S$1 to 3.44 ringgit.

TODAY spoke to some experts to understand why the ringgit continues to be weak and what their forecast would be on the strength of the Malaysian currency.

Two Malaysians working in Singapore also weighed in on the appeal of working here.

Why is the Malaysian ringgit in a slump?

The weakening of the ringgit over time could be attributed to a combination of domestic and external factors, the experts said.

Associate Professor Chia Wai Mun, an economics lecturer from Nanyang Technological University (NTU), said that factors such as political uncertainty, policy inconsistency and geopolitical tensions could affect investors’ confidence and in turn affect the currency.

At the recent state polls in Malaysia, besides retaining its strongholds in Kedah, Kelantan and Terengganu, the opposition Perikatan Nasional (PN) made headway in the ruling Pakatan Harapan (PH) and Barisan Nasional (BN) coalition¬’s dominant states of Penang, Selangor and Negri Sembilan.

Beyond this domestic risk, external factors such as changes in commodity prices may also cause the ringgit to weaken.

This is especially so as Malaysia is a major exporter of commodities that include palm oil and rubber, Chia said.

Having a high level of external debt relative to a country’s gross domestic product may also raise concerns about the country’s ability to service its debt obligations, which could lead to its currency weakening.

Investors concerned about debt sustainability might sell off the currency, leading to depreciation, she added.

The New Straits Times in Malaysia reported in February this year that the country’s external debt stood at 1,169.4 billion ringgit (S$340.7 billion) as of end-September 2022.

Chia said that a divergence in interest rates between Malaysia and other major economies may affect financial flows as well.

Higher interest rates abroad would attract foreign investors seeking better returns, leading to financial outflows from Malaysia, thereby weakening the ringgit.

Maybank’s chief foreign exchange strategist Saktiandi Supaat said that the ringgit has been weakening due to various factors, including the accumulation of United States dollar export proceeds.

This means that due to the stronger US dollar, Malaysian exporters may choose to retain its export proceeds from commodities, for example, in US dollars instead of the ringgit, which places further pressure on the ringgit and could cause it to depreciate.

More recently, China’s weaker growth and the weakness of its yuan have also weighed on the ringgit. China has been Malaysia’s top trading partner, especially in the export of palm oil and palm-based products.

From Singapore’s perspective, freelance economist Song Seng Wun said that compared to the ringgit, the Singapore dollar is stronger due to the intervention of its central bank that adjusts the exchange rate to guard against inflation, which is different from Malaysia’s monetary policy.

What’s next?

In June, Malaysia’s Deputy Finance Minister Ahmad Maslan said that the government maintains its position to not peg the ringgit to the United States dollar due to the adverse effects it would have on the public.

Speaking in Malaysia’s Parliament on June 20, Maslan said that pegging the ringgit to the US dollar would cause Malaysia to lose the ability to continue its monetary policy and also risk resulting in capital outflows.

This would mean that Malaysia would not be able to regulate the movement of foreign investment and this will affect the country’s “confidence and competitiveness”, Maslan added.

At the same time, the pegging will force its central bank to raise interest rates to the same level as that in the US, which are high.

Higher interest rates are a hinderance for borrowing and lending activities between businesses and banks in Malaysia, given that businesses have to take higher interest rates for loans, Dr Nur Ain Shahrier, an assistant professor of economics at Sunway University, told Nikkei Asia in July.

Furthermore, this steep increase in interest rates also makes it more expensive for consumers, businesses, and even the government to borrow money for consumption or development, all of which makes pegging the Malaysian ringgit an undesirable option, reported Malaysian newspaper the New Straits Times in August.

Malaysia pegged the ringgit at 3.8 to the US dollar during the Asian Financial Crisis in 1998 and imposed capital controls, but this was removed in 2005.

Its finance ministry said in June that the government remains committed and focused on implementing structural policies that are able to increase economic growth and the country’s competitiveness in order to attract inflows of funds and foreign investment that will support the ringgit.

Ultimately, because a country’s currency is influenced by external factors as much as domestic ones, it would be difficult to fully predict how its currency would move.

Song said that it is hard to say when the ringgit would strengthen. He noted that the currency rose for a while, but it is still difficult to predict whether it will recover completely.

“It is really a case of how well the economy is doing... as well as investor confidence in its political stability.”

Still, Saktiandi from Maybank said that the ringgit is expected to somewhat strengthen going into 2024. Malaysia’s recent announcements on the “Madani Economy” and its green initiatives would be a “positive” sign for its economy and its ringgit in the medium term.

The Madani Economy is Prime Minister Anwar Ibrahim’s vision and framework for the country’s economic policies centred on six core pillars of sustainability, prosperity, innovation, respect, trust and compassion.

Analysts said that another factor that could point to a slightly more favourable outlook for the ringgit next year is an expectation that the US Federal Reserve will slow down its interest rate hike, having already raised rates by 5.25 percentage points since March 2022 in a bid to curb inflation.

For now, as long as the Malaysian ringgit remains weak against the Singapore dollar, Singapore will likely continue to see an influx of Malaysians seeking work here.

Song, noting that the Singapore economy has been “consistently creating more jobs”, said: “With the pandemic waning and the Singapore economy recovering, there has been an influx of jobs and opportunities, which continues to make Singapore an attractive place for work.”

What Malaysians think of the ringgit slump

Despite the long trips they have to make across the border, Malaysians are making full use of the ringgit’s slump by continuing to work or find work in Singapore, two of these workers told TODAY.

One of them, Muhammad Fariezatul Firaus Ahmedt, wakes up at 4am and rides for two hours on his motorbike to reach his workplace in Singapore at 6am.

Originally from Kampung Kubang Kerian Bukit Panau in the Tanah Merah district of Kelantan, he moved to the suburb of Kempas in Johor Bahru for easier daily commute to Singapore. It is about 20km from the Woodlands Causeway.

He has been commuting back and forth like this for close to three years.

The 32-year-old works at a cleaning firm and said that even though he has to wake up so early, the salary he has earned here has allowed him to achieve his “dream” of buying a car and a house back in Malaysia.

“The salary (here is) good for a Malaysian worker,” he said, expressing hope that he may save enough to take his wife and mother on a trip to the Saudi holy land of Mecca.

For 44-year-old engineer James Lim, who has travelled up and down the Causeway from Johor Bahru for two decades and noted that traffic along the linkway “has been getting worse”, the trips are still worth it.

With the rising cost of living in Malaysia, the weakening ringgit “does help”, he said, even though the salary he draws these days is “not high”.

“But of course, (it’s still) better than the pay in Malaysia. I would say around 50 per cent more.” — TODAY