Kota Kinabalu: The principal factor affecting the ringgit’s underperformance is the spread in interest rate between the United States (US) and Malaysia.
University Malaysia Sabah Lecturer of Financial Management and Banking, Dr Izaan Azyan Abdul Jamil said there is a high tendency for capital flight from Malaysia to the US as investors seek higher returns.
“The current US interest rate standing at 5.25 per cent compared to Malaysia’s rate of 3 per cent.
“Raising Malaysia’s interest rate to match that of the US could soar the anger and impose additional financial burdens on the public.
“It will increase borrowing costs and monthly repayments particularly in the post-pandemic period when individuals and businesses strive to rebuild,” he said.
He said foreign institutions invest in Malaysia through two primary channels in the capital market.
“Firstly, they bring capital into the country for establishing factories and businesses. Secondly, they invest in Malaysian stocks, bonds, government securities, and other financial instruments.
“Foreign investments in Malaysia’s capital markets offer flexibility, allowing institutions to buy and sell assets rapidly, even within a single day.
“It’s because we do not impose any capital control like we did in 1998… when the US offers superior returns, foreign institutions tend to divest their Malaysian holdings, converting their funds into USD and redirecting their investments towards the US market.
“This capital outflow contributes to the weakening of the ringgit. Supporting the capital market during a period of weak ringgit can be likened to exacerbating the problem,” he said.
Like rubbing a salt into the wound, foreign institutions tend to sell off their holdings, leading to a decline in the Malaysian stock market.
“It would be more prudent for the government to utilise taxpayer money to assist the people and spend in sectors with promising growth potential, particularly in agriculture and start-up businesses.
“By directing resources towards these areas, Malaysia can foster sustainable development and create opportunities that benefit the wider population.
“This approach would enable the government to prioritise the well-being of its citizens while simultaneously supporting the economy, rather than burning taxpayer’s money in stock market,” he said.
He said careful management of the ringgit and the capital markets is necessary to address the concerns surrounding their performance requiring a nuanced approach that accounts for the delicate balance between currency support, reserve preservation, and the dynamics of foreign investments.
“Bank Negara Malaysia (BNM) should actively support the Ringgit while taking into consideration the preservation of the reserve.
“Given their expertise, BNM is best positioned to determine appropriate measures for stabilising the currency’s performance,” he said.
As of June 15, 2023, Malaysia’s international reserve stands at approximately USD 113 billion (RM 527 billion), a portion of which BNM utilises to support the ringgit.
However, BNM typically aims to maintain the reserve above USD 100 billion as a rule of thumb. The challenge lies in striking a balance between supporting the Ringgit and preserving the reserve.
Economic Minister Rafizi Ramli has recently expressed a preference for investing in projects that benefit the people rather than using the reserve to prop up the ringgit.
