BNM Governor: Ringgit’s performance against USD not a reflection of the state of the economy

KUALA LUMPUR, Oct 3 2022 – Bank Negara Malaysia (BNM)’s Governor Tan Sri Nor Shamsiah Mohd Yunus today emphasised that the ringgit’s performance against the US dollar alone is not a reflection of the state of the economy as the exchange rate is only one indicator among many.

“It is important to consider the strength and positive performance of the Malaysian economy. Growth is robust, the labour market is healthy and the financial system is resilient and continues to perform its role effectively,” she said in her speech titled “Navigating Malaysia’s Economic Transition in a post-COVID World” at the Khazanah Megatrends Forum 2022 here today.

Further, she said, Malaysia has a strong external position with more foreign currency assets than foreign currency liabilities and foreign currency borrowings only account for less than three per cent of total Federal Government debt.

Nor Shamsiah stressed that a flexible exchange rate continues to be relevant as it allows the country to absorb external shocks. It also allows the MPC (Monetary Policy Committee ) to set the policy rate based on Malaysia’s domestic growth and inflation outlook, rather than be constrained in having to follow the monetary policy of other advanced economies, she said.

“Now, we know that exchange rate movements create winners and losers. No doubt, the dollar strength will raise the cost of imported goods, including food prices. Imported inputs account for less than 20% of production costs.

We understand that the increase in prices especially in food prices is a concern for many. And although the exchange rate impact on inflation is not one to one, it partly contributes to the rising cost of living as higher commodity prices and supply disruptions affect domestic prices,” she said.

Nor Shamsiah said various measures are being implemented to lessen the impact of this increase in prices and these include social assistance, stabilisation of prices and access to discounted necessity goods.

“Since January this year, we have seen the ringgit depreciating by more than 10% against the US dollar. But on this, we need to be clear that the strength of the dollar is a global phenomenon – not just a Malaysian one,” she said.

In fact, Nor Shamsiah said, the US dollar is now at a two-decade high due to the aggressive tightening of monetary policy by the Federal Reserve which increased its policy rate by 300 bps this year. Risk-off sentiments arising from geopolitical conflict and a moderating global growth outlook have further increased demand for dollar assets, she added.

“Like most countries in the world and around this region, the ringgit has not been spared. The currencies of other major economies have also depreciated against the US dollar.

If we look at how the ringgit has fared against the currencies of our trading partners, it has appreciated against some and depreciated against others. In fact, the performance of the ringgit, if weighed against the currencies of Malaysia’s trading partners has been relatively stable. This underlines the point that we are in an environment of US dollar strength,” she explained.

On the other hand, she said, the ringgit depreciation is also expected to benefit export-oriented sectors which employ more than 30% of the Malaysian labour force.

“In fact, Malaysia’s exports have increased by 30% this year supported by several factors, including exchange rate valuation gains. The acceleration in export growth has, to some extent, contributed to higher job creation and an increase in wages. This shows that it is important that we have a diversified economy that helps to mitigate external shocks,” she said.

According to her, it is also important to preserve orderly financial market conditions by avoiding large swings in the exchange rate so as not to disrupt economic activities.

“This will enable the exchange rate to serve as a shock absorber – not a shock amplifier – to the domestic economy. While Bank Negara does not target any level of the exchange rate, we will closely monitor and ensure orderly market conditions.