Last week, the ringgit strengthened to its highest level against the US dollar in about six months. That surely brings some relief to many households, given that the weak ringgit has been driving up prices for imported goods and services and exacerbating the cost of living inflation, especially for parents with kids studying overseas. Here’s the question; is the recent gain sustainable and indeed, will the ringgit continue to strengthen as many in the analyst community are predicting? We have written extensively on the ringgit and the key factors driving its exchange rates relative to other currencies, both in the short term and long term.
Based on our analysis of the data, we concluded that the ringgit has been on a secular downtrend for decades, not only against the US dollar but also against the currencies of other major competing economies like Singapore. This is due to long-term structural issues in the economy, primarily Malaysia’s lagging productivity growth — made worse by wage increases that are consistently in excess of productivity gains — against our closest competitors in the global market. And that this slow productivity growth is due to poor government policies over the years. As a result, to maintain export competitiveness, the ringgit must depreciate. In other words, Malaysia relied on an ever-weakening of the ringgit (an “undervalued” currency) to make exports cheaper. You can read our article entitled “Secular decline in ringgit’s value due mainly to falling relative competitiveness — a result of decades-long poor government policies” by scanning the QR Code for a refresher.
