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KINIGUIDE When international financial newspapers made this damning declaration in November last year, the ringgit had fallen to RM4.46 to the US dollar.

Only a week into 2017, it continued to slide to RM4.50 against the US dollar, raising fears that the plunge could go beyond the RM4.88 level in 1998 - the worst in the ringgit's history.

In this edition of KiniGuide, Malaysiakini takes a look at how bad the ringgit is really faring and what are the factors behind the currency's weakness.

Did 2016 see the highest fall of the ringgit in recent years?

Actually, no. The worst fall in recent times was in 2015 when the ringgit exchanged for 18.7 percent less to the US dollar compared to the year before.

This was in line with a regional decline with Indonesia (-10 percent), Thailand (-8.65 percent), Singapore (-6.46 percent) and the Philippines (-5.36 percent) also seeing their respective currency fall against the US dollar but Malaysia was the worst hit.

 

The ringgit's December average value against the US dollar was RM3.48 in 2014 but experienced a dramatic fall to RM4.28 in 2015. The December average value in 2016 was RM4.46, which is a smaller drop compared to the previous year.

By the end of 2016, the Thai baht and Indonesian rupiah saw a slight recovery with their value increasing by 0.61 percent and 4.17 percent respectively against the US dollar.

Singapore saw a slight decline against the US dollar in 2016, falling by two percent.

While the Philippines peso performed worse than the ringgit in 2016, declining 5.16 percent against the US dollar, it did not suffer such a dramatic fall in the preceding year like Malaysia did.

Therefore, the ringgit's decline of 3.96 percent against the US dollar in 2016 - at a time when the currency desperately needed a recovery - was still a painful one as it plunged to its worst level since the Asian financial crisis.

What factors are affecting the ringgit's strength?

The norm has been to blame the scandal-plagued 1MDB. However, blaming 1MDB alone is an oversimplification of the issue as the ringgit is affected by a myriad of factors.

Many of the factors boil down to one simple question: Do investors have confidence that Malaysia can withstand economic shocks and fulfil its short-term debt obligation? If they do not, demand for the ringgit will fall and so will its value.

For the layperson, it is a question of how much savings you have and how much you owe on your credit card.

Banks aren't likely to loan you money if you owe too much and own too little, and if they do, you will be charged higher interest rates, which may make your debt problems worse.

The same applies to a country and a similar scenario is considered by institutions such as the International Monetary Fund (IMF) when assessing how vulnerable a country is.

Among benchmarks used for a country are its international foreign reserves (your savings) and short-term external debt (your credit card debt).

Why are foreign reserves important?

The foreign reserves are important as countries have to dip deeper into the reserves in times of crisis to pay their short-term external debt.

 

Regional countries have over the years accumulated substantial reserves as an "insurance" and Malaysia is no exception.

However, since 2013, Malaysia's foreign reserves began to shrink - falling from US$134.91 billion to a low of US$95.29 billion in 2015.

Currently, Malaysia's foreign reserves are expected to be at US$108.91 billion, only 18.97 percent higher compared to 2008, the year before Prime Minister Najib Abdul Razak came to power.

In contrast, the foreign reserves of other regional countries are significantly higher in 2017 compared to 2008 - Thailand (+47.1 percent), Indonesia (+160.24 percent) and the Philippines (+130.39 percent).

Thailand has consistently bigger reserves compared to Malaysia, and Indonesia overtook Malaysia in 2015.

While the Philippines may have much smaller reserves compared to other countries, it also has very low short-term external debt. Nevertheless, it has significantly narrowed its international reserves gap with Malaysia.

What about short-term external debt?

Bank Negara has repeatedly insisted that Malaysia has sufficient international reserves.

The amount is no doubt respectable but when viewed alongside Malaysia's short-term external debt, it raises legitimate concerns.

 

According to IMF estimates, Malaysia's short-term external debt is expected to hit US$132.18 billion in 2017. This is almost three times higher than the 2008 levels (a rise of 296.22 percent).

In contrast, the short-term external debt for Thailand, Indonesia and the Philippines in 2017 is only expected to be US$67.16 billion, US$57.94 billion and US$21.54 billion respectively.

This is an increase of 48.85 percent for Thailand, 96.34 percent for Indonesia and 51.80 percent for the Philippines compared to 2008.

With Malaysia's very high short-term external debt compared to its regional peers, its international reserves are perceived to be potentially insufficient in the event of a crisis.

This has caused investors to view Malaysia as a riskier country, and thus are likely to sell off the ringgit in their possession, driving down its value.

In the same vein, when it comes to 1MDB, the concern is that Putrajaya will need to bear the company's massive debts and whether they can be paid off on time - particularly the short-term ones.

What is the role of currency speculators?

While lower international reserves and high short-term external debt may drive away investors, it attracts currency speculators.

A country that is perceived to have insufficient reserves to cover its short-term external debt will more likely be exposed to a "currency attack".

This is when traders speculate on the ringgit, increasing its volatility, which opens the opportunity for them to make a quick profit.

Central banks can normally counter this by "defending" the currency, selling their international reserve in exchange for the local currency, thereby propping up the latter's value.

However, if a country's international reserves are insufficient, the central bank may think twice about spending too much to defend the currency, as it will want to save the reserves for other emergencies - for example paying off short-term external debt.

As a result, the local currency will become more vulnerable to wild fluctuations.

Do US interest rates affect the ringgit?

Yes. US interest rates have been at a low 0.25 percent for close to a decade as the country struggled to recover after the 2008 subprime mortgage crisis.

The low interest rate was intended to help recovery by making loans cheap and encouraging spending, but it also made keeping money in the US unattractive for investors.

With the US recovery now on track, the US Federal Reserve increased interest rate to 0.5 percent in 2015 and to 0.75 percent in December last year.

Coupled with US president-elect Donald Trump’s proposed policies on domestic investments, US interest rate hikes are expected to accelerate.

Investors, who have previously invested elsewhere, including Malaysia, will now be inclined to shift their money to the US to take advantage of the increasing interest rates.

This translates to a reduced demand of non-US dollar currencies, including the ringgit, driving their values down.

Investors shifting to the US dollar also means an increased demand for the currency, driving its value up.

As the ringgit strength is often measured against the US dollar, a weakening ringgit and a strengthening dollar is a double whammy.

This is part of the "domino effect" a rapid US interest rate hike can have on the ringgit.

What about foreigners holding M'sian government bonds?

When a country increases its interest rates, the yields of its bonds also increase. Bonds are used by government and corporations to raise funds from the open market.

In the case of the US, if US bond yields keeps improving, then Malaysian local currency government bonds will no longer seem as attractive.

It will cause investors to move away from Malaysian local currency government bonds, and in our case, the impact on the ringgit is particularly serious.

This is because a large portion of Malaysian local currency government bonds are foreign-owned thus making Malaysia more vulnerable to shocks when faced with a sell-down.

According to AsianBondsOnline, Malaysia and Indonesia are amongst the countries which local currency government bonds have large foreign holdings.

 

Data from June 2016 showed that 34.52 percent of Malaysian local currency government bonds were held by foreigners while for Indonesia, the figure stood at 39.1 percent.

The foreign holdings of local currency government bonds for Thailand, Japan and Korea are 14.48 percent, 10.05 percent and 9.65 percent respectively.

The foreign holdings of Malaysian local currency government bonds have further increased to 35.75 percent in September 2016.

What about other factors, for example the fall in oil price?

There is a myriad of other factors which can affect the ringgit's value. Among them is the fall in oil prices, which has impacted Malaysia's revenue.

The oil crash began in late 2014 when the US began to flood the market with shale oil, made possible by the advancement in horizontal drilling.

Brent Crude oil went from the 2014 high of US$114.81 per barrel to a record low of US$28.94 per barrel in 2016.

 

As a result, Malaysia's projected revenue in the national budget shrunk for two consecutive years - from RM235.2 billion in 2015 to RM225.7 billion in 2016 and RM219.7 billion in 2017.

A country running short on funds will likewise raise concern about its ability to meet its debt obligations, thus making investors wary of holding on to the ringgit.

However, the impact of this may taper off after the Organization of the Petroleum Exporting Countries (Opec) as well as other oil-producing countries agreed to slash output.

Brent Crude Oil has since recovered to US$55.88 per barrel as at Jan 4, 2017.

How do China’s monetary policies affect the ringgit?

China is Malaysia's largest trading partner, and therefore is another factor affecting the value of the ringgit.

Faced with slowing economic growth, China has repeatedly devalued its currency in a bid to make its exports to the US, its largest trading partner, cheaper. In doing so, China hopes to sustain its economic growth, which is significantly based on exports.

While devaluing the renminbi makes exports cheaper for China, it also makes imports more expensive. This means China will find Malaysian goods more expensive and will less likely import them.

However, the ringgit's continued weakening due to other factors has helped to keep its export goods competitive, cancelling out the China factor to some extent.

This instalment of the KiniGuide was compiled by Nigel Aw.

More charts

Rise and fall of regional currencies

International reserves

Short-term external debts

Foreign holding of government bonds 

MP Speaks - Will 2017 bring relief and recovery for the ringgit?