The Falling Malaysian Ringgit

Let's talk for a second about why the declining value of the ringgit matters or maybe why it doesn't not matter. Because I have heard some arguments that a deflating value of the ringgit could actually be good for Malaysia based on the theory that a weaker domestic currency provides a boost for exports. The idea being that international, purchasers are going to be more attracted to buy Malaysian exports because it's cheaper, and that's great in theory. Now, nobody denies that a weaker ringgit is bad for Malaysian imports since the fewer dollars you can buy with ringgits means that the cost of importing goods from overseas in dollars is gonna cost you more. But again, the argument is that this additional cost will be offset by the boost in Malaysian exports.

Well, there's a few problems with that, which is why I said it's a great idea in theory. Because what are Malaysia's main exports? By far, they are integrated circuits, micro assemblies, chips, and so forth. Well, the problem is that this entire sector is import dependent. This is not wholly or even mostly an independent indigenous industrial sector for Malaysia.

These activities, these products, this entire sector is chronically reliant upon imports. It's part of an outsourced value added supply chain. Thus, the increased cost of imports will cut directly into the profitability of exports. And then you also have the palm oil and agricultural sectors that export abroad. But both of these industries are also heavily reliant upon inputs imported from overseas such as fertilizer.

Now the cost of fertilizer has nearly doubled since August because of the war in Ukraine and the sanctions against Russia, and there are severe shortages in the availability of fertilizer in the market. Now again, because of the deflated value of the ringgit, the palm oil and agricultural sectors that export abroad will suffer a decrease in the their value, their export value due to the higher cost of importing the inputs necessary for those sectors to function at all. So it's no wonder that Malaysia's trade surplus has declined by roughly a billion dollars since last year, and imports have risen by around 37%, while exports have only risen by around 30%. So you see it's not quite as simple as just saying that a weak currency boosts exports. That's not necessarily the case.

And then add to this the fact that most Malaysians do not work in export focused industries. They don't work in export focused sectors of the economy. Roughly 70% of the entire workforce in Malaysia is employed in service, sales, retail, and so on. And these are sectors that suffer considerably when the domestic currency is weakened. So, yes, the declining value of the ringgit is not something that can just be shrugged off, And it's gonna take a lot more than pacifying assurances that everything is gonna be okay to solve the problem.