The Ringgit's Risk

Encik Wan said...

At what level, appreciation of Ringgit is too much to bear? USD/RM = 3.00?

Currency appreciation is always equated to reduction in competition. Since we had the peg at RM3.80 to the dollar, many investors have been fixated at that as an anchor. We have to remind ourselves that the ringgit was at 2.7 before the Asian financial implosion. Yes, most Asian currencies were overvalued lulled by excess liquidity then. However, the 3.8 peg was artificial and boosted our competitiveness no end. In fact, the ones laughing all the way to the bank are the plantation owners. Did you ever see Lee Shin Cheng ever not smiling for the past 10 years?!

Thankfully we had a new Bank governor who is prudent and conservative thus bringing about a currency ladened with sound fundamentals now. Can we compete at 3.0 to the USD? Well, I think we can compete at 2.8 even as we speak. Hence 3.0 is not an issue. We have to be aware that the ringgit is not the only one rising. If we had gained 15% over the last 12 months against other Asian currencies, then we can start to worry a bit. Hence the ringgit's gains for the past 2 years was certainly not excessive. Just compare the ringgit with the yen, euro, Sing dollar, Thai baht, OZ dollar and you know we have not gone out of whack at all. As a matter of fact Zeti has been keeping a very tight lid on the ringgit's appreciation, making sure it did not over-run most other currencies. 2008 will be the year where Asian central banks start to use their currencies more aggressively to contain inflation risk.

I certainly think that moving forward, the euro, pound, OZ dollar have a lot more at risk - their currencies are gaining at the same speed as most against the USD but the structure of their economy will be threatened by over-pricing themselves out of many industries over the next few years. The outsourcing (globalisation) effect will ensure that jobs will be lost and industries crushed by having an inflated currency. The Fed has basically successfully exported their problems to Europe, Australia and Japan. We are too blinkered on the US for the time being. We should be able to see a different set of problems affecting this new group over the next 24-36 months.

An example of why the ringgit is a lot stronger and undervalued still. Just look at the interest rates now. The differentials with the yuan and OZ dollar is significant. The differentials show that you need a "higher rate" to hold these currencies. The yuan could be a bad example because it is tightly controlled, and rates are kept high to kill off inflationary pressures. You get the drift.

Although Malaysia still does a significant amount of trading with the US, the slowdown in the US is largely banking based and property related, rather than trading goods and services. The present economic paradigm favours net exporters of commodities and soft commodities, which Malaysia is. If you ask me where the parity is for the ringgit: it should be at 2.6 against the USD; 4.0 against the Euro; 5.0 with the pound, 2.4 with the OZ dollar and 1.9 with the Singa dollar. Anything above those levels, we are competitive and continue to attract FDI.

p/s photo: Maggie Q