In the realm of international finance, the stories of different currencies often unfold with distinctive narratives and outcomes. Such is the case when we examine the journeys of two Southeast Asian currencies: the Malaysian ringgit (MYR) and the Singapore dollar (SGD). These currencies, belonging to neighbouring nations, have followed divergent paths shaped by a variety of economic, monetary, and trade factors.
As a Malaysian that frequents Singapore myself, I’ve seen firsthand how each country’s respective economic landscapes, policy frameworks, and external influences have shaped their present-day positions. Exploring the contrasting trajectories of the MYR and SGD provides valuable insights into the dynamics of currency exchange rates, economic stability, and investor confidence.
1. Economic fundamentals
Throughout its history, Singapore has consistently demonstrated a robust and stable economy, characterized by remarkable GDP growth, low inflation, prudent monetary policies, and an inviting investment climate.
In contrast, Malaysia has faced challenges arising from its heavy reliance on price control mechanisms and subsidies. According to Dr. Apurva Sanghi, the World Bank’s lead economist for macroeconomics, trade, and investment, Malaysia stands out with one of the highest numbers of price-controlled items in the region. Notably, over half of the surveyed firms affected by these controls reported a 25% reduction in their production due to their inability to generate profits. These factors pose a threat to the efficiency and competitiveness of Malaysia’s economy, ultimately impacting the value of the ringgit.
The implementation of price controls restricts producers’ capacity to generate substantial profits, while subsidies fail to encourage the production of goods and services that align with consumer demand. Consequently, Malaysia has struggled to diversify its domestic production, leading to an increased reliance on imports in crucial product categories. This trend not only weakens the overall economy but also undermines the value of the ringgit, presenting further challenges to Malaysia’s economic stability.
2. Monetary policies and central bank interventions
The Monetary Authority of Singapore (MAS) has adopted a distinctive approach by centring its monetary policy around exchange rates through a managed float exchange rate regime for the Singapore dollar. Unlike traditional central bank practices of directly manipulating interest rates, MAS focuses on targeting exchange rates. This regime empowers MAS to intervene in the foreign exchange market and adjust the value of the SGD within a specified range against a basket of other currencies, referred to as the S$NEER (Singapore Dollar Nominal Effective Exchange Rate). By adopting this strategy, the MAS ensures stability and adaptability to market dynamics.
Because there is no explicit interest rate policy, Singapore interest rates are market-driven and closely correlated to U.S. interest rates. Consequently, the Singapore dollar experiences less pressure in terms of yield differentials. This unique approach has contributed to the strength and resilience of SGD.
On the other hand, Malaysia operates under a free-floating exchange rate regime for the ringgit. This means that the value of the ringgit is primarily determined by market forces, which makes it more vulnerable to external shocks. While a free-floating regime offers flexibility, it also exposes the currency to increased volatility and fluctuations.
This scenario unfolded in 2022 when the U.S. Federal Reserve implemented a robust policy of raising its interest rate by 425 basis points, setting a target range of 4.25-4.50% to tackle inflation concerns. As a result, the increased returns on U.S. financial assets fuelled a surge in demand for these assets, triggering a prolonged period of U.S. dollar appreciation. Consequently, the ringgit experienced depreciation against the U.S. — and Singapore dollar — throughout the year due to widening yield differentials.
It’s important to note that rate hikes in Malaysia have been relatively slower compared to other major currencies. BNM has made it clear that its mandate is to tackle inflation rather than focus on strengthening the ringgit. Consequently, it is unlikely that BNM will embark on an aggressive rate hiking path akin to that of the U.S. This approach is aimed at easing pressure on Malaysian citizens, as well as reducing the risk of defaults for businesses and homeowners.
3. Trade imbalances and productivity
Trade imbalances and productivity are crucial factors that can significantly influence currency exchange rates. Singapore has effectively diversified its economy, positioning itself as a global hub for finance, trade, and technology. Its impressive level of productivity has attracted foreign investments and fostered a robust export sector. In contrast, Malaysia, despite its prominence in manufacturing and natural resources, faces challenges associated with trade imbalances and a heavy reliance on low-value exports. The decline in commodity prices, such as palm oil and crude oil, has further impacted the sentiment surrounding the ringgit.
The economic recovery of China holds particular significance for the value of the ringgit, considering China’s position Malaysia’s largest trading partner. The depreciation of the Chinese yuan, coupled with subdued optimism regarding China’s reopening, has exerted a noticeable influence. The decline in exports to China stands as a major contributing factor to Malaysia’s 1.8% contraction in exports during the first quarter of 2023.
Given Malaysia’s substantial trade exposure to China, the value of its currency is heavily dependent on China’s economic recovery. Consequently, developments in China’s economy and its currency can significantly impact the performance of the Malaysian ringgit.
4. Investor confidence and stability
Singapore has been fortunate to possess political stability, transparent governance, an efficient legal framework, and investor-friendly policies, all of which have created an attractive environment for businesses and investors. This stability fosters confidence in the Singapore dollar and leads to increased demand, resulting in currency appreciation.
Malaysia, despite maintaining relative political stability, has faced challenges related to governance concerns, corruption allegations, and policy uncertainties. These factors can erode investor confidence in the ringgit. Recent global uncertainties, such as the U.S. debt ceiling issue, the Russia-Ukraine conflict, and inflationary pressures, have further prompted some investors to seek refuge in safe-haven currencies like the Singapore dollar. Supporting this trend, a recent report by credit rating agency Fitch highlights that Singapore holds a AAA rating, while Malaysia is rated BBB+.
The fifth perspective
While a weaker Malaysian ringgit may bring some benefits to Singaporean shoppers enjoying cheaper trips to Johor, it is essential to consider the broader implications for both countries.
As Malaysia grapples with the continuous depreciation of the ringgit, it is crucial for global investors to carefully understand the impact of unfavourable foreign exchange rate movements before making any investment decisions, as they can significantly affect returns. For instance, even if a stock yields a 10% return, if the currency depreciates by 10% against the investor’s local currency, the actual returns will amount to nothing.
It is crucial to acknowledge the complexities of Malaysia’s economic landscape and recognize the potential impact on its relationships with neighbouring nations. A stable and prosperous Malaysia not only benefits its own citizens but also contributes to the overall prosperity and development of the region. Addressing the underlying issues and implementing effective solutions is vital for Malaysia’s long-term growth and stability. By working together, both nations can foster a mutually beneficial relationship and pave the way for a brighter future for both Malaysia and its neighbouring nations.
