This article first appeared in Forum, The Edge Malaysia Weekly on October 14, 2024 - October 20, 2024

The sharp rise of the Malaysian ringgit against the US dollar (USD) over the past few months has sparked the public’s pride in and optimism towards the country. While currencies broadly appreciated against the USD as markets priced in the US rate cut cycle, the ringgit stood out as the top performer among Asian currencies, appreciating 13% over the last quarter (USD/RM exchange rate as at end-September: 4.12 versus end-June: 4.72). Many Malaysians are thrilled by the ringgit’s newfound strength, especially in contrast to last year, when it was one of the worst-performing currencies in the region. However, as exciting as this may seem, the rapid rise comes with trade-offs and potential risks.

A stronger ringgit undoubtedly brings benefits. Importers gain as the cost of goods and services from abroad decreases, helping to reduce imported inflationary pressures. This, in turn, boosts consumer purchasing power and improves living standards. For businesses and governments with foreign-denominated debt, a stronger currency also means lower repayment costs.

However, the recent sharp appreciation of the currency does not necessarily translate into broad economic well-being. The volatile movements could create challenges for businesses, disrupting business planning and making it difficult for companies to adjust pricing and operations. Ideally, a gradual appreciation would be preferred as it allows businesses and the economy to adjust more smoothly, providing long-term stability.

The ringgit’s recent appreciation was also partially driven by a general “feel-good factor” across global markets, which may have inflated the pricing premium for Asian currencies. This is likely why the ringgit recently retraced to around 4.30 against the USD, as sentiment weakened due to the military conflict in the Middle East and reduced market bets of US rate cuts.

On a broader macroeconomic level, a stronger ringgit comes with significant trade-offs for certain segments of the economy.

Malaysia is a highly export-oriented economy, with sectors like electrical and electronics (E&E) and commodities among its key growth drivers. As the ringgit strengthens, these exports become more expensive in global markets, eroding competitiveness. For businesses pricing their goods in USD, a stronger ringgit also means lower earnings when converting foreign revenues back into local currency. Export-oriented small and medium enterprises (SMEs) are particularly vulnerable, as many lack the sophisticated hedging strategies that larger companies use to cushion against currency fluctuations. This could result in lost revenue and weaker growth in these critical sectors.

Additionally, the tourism sector might face challenges as Malaysia becomes a more expensive destination for international visitors compared with its neighbours. This could hamper the post-pandemic recovery of this lagging sector.

One critical question is whether the ringgit’s appreciation is driven by solid economic fundamentals or merely external factors, such as a weakening USD. Historically, the ringgit has in most cases struggled to break below the 4.00 mark against the USD, except during periods of ultra-loose monetary policy by the US Federal Reserve. Although the ringgit has arguably been undervalued for a prolonged period, and its recent appreciation may reflect a move towards its “fair value”, if the ringgit strengthens further at its current magnitude and pace, questions about sustainability will arise.

That said, Malaysia can certainly stabilise at a stronger equilibrium. Several other countries have demonstrated that long-term currency strength is possible, but only when underpinned by robust fiscal discipline, economic transformation and technological advancement. For Malaysia, the challenge lies in ensuring its economic fundamentals are strong enough to support a sustained rise in the ringgit. Without addressing structural issues such as productivity growth, moving up the value chain and embracing technological transformation, further appreciation may be difficult to sustain.

Fortunately, there are concerted efforts underway to elevate the country’s economic development, such as the New Industrial Master Plan (NIMP) 2030 and the Madani Economy framework. If goals such as advancing Malaysia’s economic complexity, digitising the economy and uplifting the income of the rakyat are successfully met, this would provide a solid foundation for a stronger ringgit. In the meantime, it is essential to temper public enthusiasm and acknowledge that a stronger currency comes with its costs. The challenge will be in finding the right balance to ensure long-term growth and stability.

Woon Khai Jhek, CFA is a senior economist and head of the economic research department at RAM Rating Services Bhd

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