EXCHANGE rates' performance in the long-run is a litmus test for any country as the efficacy of economic management. That is true of the ringgit, rupiah, and other currencies.
Ringgit was pegged to the British pound when the Sterling was the darling of central banks in the post-war years to 1960s.
Malaysia switched to the US dollar in 1970s using later a version of trade-weighted basket management. At the time of its shift, RM2.50 could buy one US dollar compared to RM4.35 as of May 2020 in the face of Covid-19 pandemic. Several countries with astute international economic management keep their currencies steady against US dollar, for examples Swiss Franc, Euro, and Singapore dollar.
In fact, these currencies keep appreciating against the US dollar. The Swiss Franc (SF) was valued at 0.98 per US$1 in May-2020 compared to 0.85 SF some years ago. Some exchange rates recorded depreciation. The rupiah went from 5,500 per US dollar in 1980s to 14,500. Individual/businesses need RM4.35 now compared to RM4 before the Covid-19 pandemic.
The ringgit was at RM2.50 per US dollar in early 1970s. These told a story about the efficacy of currency management reveal some countries are (i) holding steady their currencies, (ii) some even appreciate their currencies while (iii) some have tended to depreciate currencies.
What are the factors behind these? Every money changer knows by heart that sudden political and economic crises do knock currencies to go South. Despite Malaysia's satisfactory economic fundamentals in June 1997, the contagion from Indonesia, Korea, and the Philippines - all heavily-reliant on short-term funds - decided to quickly switch to high-tech and long-gestation investments.
That scared foreign short-term fund providers and subsequently precipitated the Asian Financial Crisis from May 1996 to November 1999. Ringgit users will recall having to pay RM4.44 for one US dollar. China positioned herself with a 38 percent official depreciation of Yuan several years before 1997 to make China-based-manufacturing cheaper.
That served as the pull factor leading to US$210 billion leaving Malaysia and the three other countries. To make matters worse, residents repatriated RM57 billion to banks outside Malaysia. When production volume increased with more production shifting to China from our regions, production costs declined relative to, for example Malaysia-based production.
That gain led to manufacturing activities declining in Southeast Asia. Economic fundamentals drive long-run path of an economy, so ringgit's decline ought as a matter of fact be tied to economic fundamentals worsening ever since the 1970s with budget deficits (governments spending beyond their incomes) and trade deficits (terms of trade not favourable to the ringgit-holders).
What else could explain the falling ringgit or rupiah Indonésia? Persistently low productivity level of workforce in Indonesia means there will be a built-in bias for rupiah to slide as well as the failure to control inflation rate. The two factors at work from 1955 led to rupiah as the fastest depreciating currency in the region. From rupiah today 14,500 to one US dollar means rupiah is worth 4 percent of its 1955 value!
Malaysia under the fourth prime minister who ruled till 2005, Malaysia's Central Bank (BNM) instituted inflation targeting while pursuing workforce training. This momentum was lost when a taste for foreign workers by businesses and attraction of revenue from levies for government led to loss of productivity.
Hence, economic fundamental factors apart from the 1997-98 Asian crisis are for ringgit as well. Add Covid-19 at present as another factor that influence the ringgit.
Covid-19 started in Wuhan in November 2019. Official news came in December and by January 2020 there were 24 cases in Malaysia. The ringgit path shows Covid-19 pushed it from the average of RM4.10 before the pandemic to RM4.35 per US dollar by April 2020. This is a 6.1 percent depreciation.
Looking at the exchange rate path over just about 5 years shows the ringgit has been devalued by 25 percent. That is, still, not as bad as rupiah, some would claim.
MOHAMED ARIFF IS DISTINGUISHED PROFESSOR WHILE DR NUR AIN IS SENIOR LECTURER AT SUNWAY UNIVERSITY
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times