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Wednesday, October 16th, 2019

The value of a currency does not lie

by December 6, 2016 General


I ALWAYS used to look forward to the year-end school holidays. It was a time when my cousins and I will gather in Singapore to spend over a month at the house of our uncle while our parents enjoyed a holiday of their own.

Prior to the trip, I was given RM50 in pocket money. Going to buy things in Singapore was simple as the ringgit and the Singapore dollar were at parity. Cashiers accepted the ringgit without any fuss and gave us back Singapore dollars. But soon enough it cost RM1.05 to the dollar and the Singapore dollar has been appreciating ever since.

With the Singapore dollar now at RM3.12, it goes to show just how the Singapore economy has grown. The stronger Singapore dollar has helped the island economy, which without natural resources, build itself into a first-world economy.

There were hiccups as the Singapore dollar rose but businesses adapted and flourished. Productivity rose and so did the face of the economy with the financial sector now exerting a tremendous influence on the economy.

Through good planning and some luck, Singapore has prospered. But what does that say about the ringgit?

We have not been as good as Singapore but as were that worse off?

Looking at the Thai baht, which is at around 8 baht to the ringgit, people remember not too long ago it was around 10 baht to the ringgit. The Philippine peso now is close to 11 peso to one ringgit when it used to be between 13 and 14 peso to the ringgit.

This has not been the norm. The ringgit was at a high when crude oil prices were north of US$100 a barrel and had dipped below RM3 to the dollar and was much stronger against most regional currencies at that time a few years ago.

When crude oil prices were high, we benefitted as a commodity producer and exporter and had reaped in huge amounts of foreign reserves during that time when reserves rose to nearly US$140bil in 2012.

Statistics from Bank Negara, however, show that despite the high reserves back then, it could have been much higher. Only 1% of accumulated surpluses from trade balance receipts were converted back into ringgit during 2011 to 2015 but the central bank really did not make a fuss at that time as reserves were large and sufficient.

Times are different now. Requiring exporters to convert 75% of their future receipts into ringgit will help shore up foreign exchange reserves over time and the other benefit from the weaker ringgit and weak commodity prices that can help with foreign exchange reserves is the large manufacturing sector.

Right after the ringgit was pegged in 1998, Malaysia’s trade surplus surged and the country enjoyed large trade surpluses for nearly 20 years. Exporters benefited from the weak and stable ringgit and with the ringgit now in a slump against regional peers and trade partners, this should lead to improved competitiveness and a resumption in widening trade surpluses.

The adjustments of a currency is prone to overshooting in both directions, just like the US dollar now, but the value of a currency over time doesn’t really lie. It is also a time for a country to make adjustments for the future.