Ringgit, oh ringgit

PHOTO: Reuters

Once upon a time, some of us were used to going to Singapore to do our annual shopping when the exchange rate between the ringgit and the Singapore dollar (SGD) was still relatively reasonable.

However, in recent years, that relative reasonableness has disappeared, and for some, a new shopping paradise was found in Thailand, where the inexpensive food and lodging was seen as affordable as it was easy to convert the baht (THB) to the ringgit based on the exchange rate of 10:1, or ten THB (S$0.45) for every one ringgit (MYR) (S$0.33).

PHOTO: The Star/Asia News Network

Based on Bank Negara's monthly statistical bulletin, the end of August 2014 was about the last time the THB/MYR exchange rate was below ten and to be exact at 9.8780 per 100 THB. At the same time, the USD/MYR exchange rate then was at 3.1570 and the SGD/MYR exchange rate was at 2.5270.

Fast forward to 2020 and the THB/MYR rate was last seen at 13.5047, which basically suggests that the ringgit has weakened some 36.7 per cent against the baht.

PHOTO: The Star/Asia News Network

This is shown in chart 1. The ringgit too has weakened against the greenback as well as the SGD. Both the USD and the SGD were last seen at 4.0913 and 3.0297, which basically means the ringgit has weakened almost 30 per cent and 20 per cent against the USD and the SGD, respectively.

What has caused the ringgit to depreciate so much against the THB, while the THB itself has actually gained ground on the greenback and the mighty SGD?

Economic books tell us that the strength of a currency on a long-term basis is driven by a few factors and this includes and in no particular order, economic growth; trade and current account balances, management of a country's debt profile, international reserves, interest rates and inflation.

Hence, to understand the wide disparity in the performance between the THB and the ringgit, let's analyse some of these data. The figures extracted for all the tables in this week's column are from the respective central banks. Figures for 2019, are based on latest available data and are not the full-year figures.

First, economic growth. Over the past five years and including the estimate for 2019, the Malaysian economy has clearly been much stronger than Thailand in all the periods as seen on Table 1.

PHOTO: The Star/Asia News Network

Next, we look at benchmark inflation and interest rates of the two countries.

From Table 2, it can be ascertained that other than the period between 2014-2017, Malaysia, with a higher inflation rate, had a lower real returns (benchmark rate less inflation rate) when compared with Thailand while in 2018 and last year, as rate of inflation fell, Malaysia's real returns, which were then much better than Thailand, did not ignite interest into the forex market.

Hence, from here, we can conclude while interest rate is an important factor in a currency's strength or weakness, the impact on ringgit (well, at least as far as when compared with the baht) was rather muted.

Third, one of the determining factors in terms of strength of a nation's currency is its international reserves.

Table 3 (see next page) summaries both Thailand and Malaysia's reserves and it can be seen how Thailand's reserves has been rising over the past few years to record levels while Malaysian reserves went south.

In addition to the headline international reserves data, central banks around the world also engages in market activity to manage their respective reserves depending on inflow/outflow of funds and demand and supply of the respective local currency.

This is done via the forward and futures contract in the currency swap market and for Malaysia and Thailand, the two central banks have been carrying out two distinct market operations.

PHOTO: The Star/Asia News Network

In Thailand's case, the Bank of Thailand has been on a net long position while Bank Nergara's operations suggests it is in a net short position for its forward contracts.

In fact, we were not very much involved in forward operations until about 2015 (right about the time when our reserves were deteriorating due to outflow of funds when the Ringgit weakened due to two main factors - drop in oil prices and the 1MDB issue).

Since then, Bank Negara's net short position widened and the latest figure as at end of November 2019 showed that the current net short position stood at US$13.7billion (S$18.4 billion).

If we were to net off these long/short positions of the two central banks, the results show a significant increase in Thailand's net reserves while Malaysia's net reserves showed we are now just below US$90billion.

In percentage terms, Thailand saw its net reserves rose a staggering 36 per cent while Malaysia's net reserves dropped 23 per cent between 2014 and 2019.

The strength of the reserves will enable the nation to defend itself not only if there is an attack on its currency but as a buffer in times of economic uncertainty as there are two key components of that reserves are actually the number of months the reserve is able to sustain retained imports and to service its short term external debts, which is summarised in Table 4.

PHOTO: The Star/Asia News Network

From Table 4, we can see that Thailand has indeed a strong buffer to defend its currency should there be another attack on it, especially when the situation arises where emerging market currencies are grouped together as one.

In the past, we have seen this happening when currencies come under pressure due to weakness in reserves or current account deficits that persist over a period of time.

PHOTO: The Star/Asia News Network

Table 5 also shows that Thailand has not only a superior current account surplus but a growing surplus and this strength, when measured against the GDP, shows that Thailand's current surplus is effectively more than three times of Malaysia's surplus.

It is not to say that Malaysia's surplus is insufficient but rather our northern neighbour has a superior surplus than we do.

How did Thailand generate such significant increase in its current account surplus?

Text book tells us that current account is simply the difference between what a nation earns from it receives via exports of goods and services, income from overseas investments or remittances it received and what it pays for imports of goods and services, repatriation by foreign investors' income from the country and outgoings in terms of remittances.

PHOTO: The Star/Asia News Network

Table 6 summarises Thailand and Malaysia's trade balance as well as the services and net balance from remittances and transfers to/from each country.

This is the key. Malaysia, while is competitive in generating significant trade balance as how Thailand is able to, it is the deficit that we have in all three other segments that is not helping us to show a much better current account surplus, which in turn could see our ringgit regaining its glory days.

Thailand on the hand, enjoys not only a strong trade balance but also a surplus in its services sector and primary and secondary income sources.


Indeed, the drag that Malaysia is experiencing on its current account surplus is mainly derived from services sector, the primary and the secondary income sources. From the above data, we need more effort to:

Encourage our Malaysian companies to repatriate income earned overseas;

Potentially find ways to encourage foreign companies in Malaysia to re-invest their investment income into the country instead of remitting them back to their home countries.

This is in actual fact one of the largest sources of primary income deficit at RM43.9billion in 2018 and accounting for more than 80 per cent of primary income deficit that is earned in Malaysia, which is subsequently repatriated to the owners of capital in the form of dividends.

Plug the leakages in overseas remittances not only among Malaysians but also foreign workers (both legal and illegal) who repatriate income earned from the country.

These are not easy measures to implement but we need to think ways to keep ringgit that is earned in Malaysia to be translated into new capital or domestic consumption and not repatriated overseas and draining our surpluses, adding pressure to the ringgit as well as on our reserves.

Hopefully, if we can address the shortcomings in managing our finances, we will soon be able to see the ringgit returning to its near 10:1 ratio with the THB and perhaps much better than a third of the value that we get when we are in Singapore. Until that happens, we will be kept wondering where to go other than to Visit Malaysia (yes, it's this year) and to spend our ringgit. Ringgit oh ringgit.