KUALA LUMPUR (Nov 11): The ringgit, which has depreciated 11.2% year-to-date against the greenback, is not an accurate depiction of the health of Malaysia’s economy, said Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah Mohd Yunus.
“Let me reiterate, the ringgit depreciation is driven by the strong US dollar. As such, it does not mean that the Malaysian economy is weak and is in a crisis, and should not be taken as a simple barometer of the health of the economy,” she said during the third quarter of 2022 (3Q2022) gross domestic product (GDP) announcement on Friday (Nov 11).
She then explained that an economic crisis is usually associated with a severe contraction in GDP growth, high unemployment rate, widespread closure of businesses, and a breakdown in financial intermediation.
“We do not see these in the indicators. GDP has been growing for four consecutive quarters since the third quarter of 2021.
“Unemployment rate has continued to decline for 14 consecutive months to 3.6% in September from 4.8% in July 2021. Corporations and businesses’ financial performance remains healthy, and the public continues to spend,” she added.
The governor further noted that indicators such as retail and car sales have exceeded pre-pandemic levels while the banking system remains resilient and financing growth continues to be supportive of economic activity.
“Malaysia is not in an economic crisis,” Nor Shamsiah stressed.
She added that the performance of the ringgit also needs to be collectively assessed against the currencies of Malaysia’s major trade partners. For perspective, the ringgit nominal effective exchange rate only registered a smaller depreciation of 2%.
“Given the ongoing global risks and projected path of US monetary policy, the strength in the US dollar is likely to persist for some time. Going forward, when these external uncertainties recede, the ringgit should adjust to reflect the underlying fundamentals of the economy,” she opined.
That said, the central bank did acknowledge the weak currency will impact the cost of imports.
“We are mindful that the impact of ringgit depreciation on inflation could be higher during the current period because of the prolonged environment of elevated costs. Exchange rate pass-through also tends to be stronger for directly imported fresh food items, such as beef, though these items have a relatively smaller weightage in the CPI basket,” Nor Shamsiah said.
On the export side, the weaker ringgit has played out to strength, Nor Shamisah said, adding that the ringgit depreciation has allowed Malaysia to benefit from higher nominal export earnings.
She noted that Malaysia must enhance export resilience through policies that are focused on sustainability, technology and innovation as well as product complexity to increase export competitiveness, rather than relying on weaker currency.
Despite the currency woes, Malaysia’s external position remains manageable.
“The ringgit depreciation has led to higher value of foreign currency assets, lending support to Malaysia’s external position. Our foreign-currency external assets remain sizeable and are sufficient to cover up to 2.1 times foreign currency external liabilities,” the governor said.