KUALA LUMPUR (NewsRise) – Malaysia should build ample foreign exchange reserves and keep economic fundamentals strong to help stabilize the ringgit in the long-term as the currency remains vulnerable to perceived misconception about the country’s excessive reliance on commodities, its central bank governor said.
The ringgit’s short-term volatilities tracking news and investors’ sentiments in a globally integrated financial market belies the true character and long-term prospects of the Southeast Asia’s third-largest economy, Bank Negara Malaysia’s Governor Muhammad Ibrahim said in a speech text posted on the central bank’s website.
“What is important, therefore, is to ensure the availability of ample reserves, maintaining strong economic fundamentals and managing our exposure to external debt,” Muhammad said.
According to recent data from the central bank, Malaysia’s foreign exchange reserves totaled 392.5 billion ringgit ($97.7 billion) as on September 15, which was sufficient to finance 8.1 months of retained imports and was 1.2 times the short-term external debt.
“As we address vulnerabilities and improve domestic fundamentals, the ringgit will eventually reflect the strength of our economy,” Muhammad said.
The Malaysian ringgit has gained nearly 5% against the U.S. dollar since January, in part due to some recovery in crude oil prices, making it one of the best performing Asian currencies so far this year. The gains, however, come after the currency plunged over 20% in 2015 following a steady decline in crude prices, making it the worst-performing Asian currency against the U.S. dollar.
“Despite Malaysia’s lower dependency on commodities, the magnitude of ringgit depreciation is disproportionately higher and is even comparable to the currencies of countries that rely more heavily on commodities, such as Australia and Norway,” Muhammad said.
While oil and gas accounted for 11% of Malaysia’s total exports in 2015, Malaysia is also a major producer of other commodities including palm oil and rubber. Last year, all such commodities accounted for only 19% of merchandise exports from the country while electric and electronic products made up over one-third of total exports.
“Managing excessive volatility is particularly pertinent for small and open economies as volatile currency fluctuations not only affect trade, external debt servicing and cost of investment, but also affect domestic business and consumer sentiments,” Muhammad said. “More recently, the ringgit had adjusted to reflect changes in the global economy including the developments in the US economy and global crude oil prices.”
Malaysia’s central bank lets the market determine the level and direction of the ringgit and it intervenes only to smoothen volatilities.
Muhammad also cautioned against relying solely on monetary policy as a tool to prop up growth as Malaysia braces for what seems to be its second consecutive year of slower economic expansion.
“In particular, dependence on monetary policy as the sole instrument would be too narrow an approach,” he said. “Monetary policy at best provides an enabling macroeconomic environment to support growth, and it should not be relied upon as the primary instrument to drive growth.”
Malaysia’s central bank kept the overnight policy rate steady at 3.00% at its last meeting earlier this month. It had unexpectedly cut the policy rate by a quarter percentage point in July to help spur an economy that grew at its slowest pace in nearly seven years.
The next monetary policy review is scheduled for November.
Malaysia’s economy grew 4.0% in the second quarter, the lowest rate of growth since the third quarter of 2009, as exports slowed and agriculture output contracted. This year, the economy will likely expand between 4.0% and 4.5%, according to government forecast, after expanding 5.0% in 2015.
The ringgit rose 0.1% to 4.122 against the U.S. dollar on Tuesday.
(Source: Nikkei Asian Review)