Malaysian ringgit notes are seen among US dollar bills in this photo illustration taken in Singapore in this August 24, 2015 file photo. REUTERS PHOTO

Sharp currency depreciation usually signals a domestic crisis in the making. On that score Malaysia is competing with ASEAN peers as well as Turkey, Russia, South Africa and Brazil, with the ringgit/USD exchange rate touching levels last seen in 1998, when there was a genuine crisis that wiped out billions in savings.

This time though does seem different according to executives interviewed by Oxford Business Group. Malaysian banks and corporates are better prepared with lower leverage and more conservative business models. Asia has just survived a major international crisis in 2007/08 and came out stronger. The prevailing consensus view is that this is temporary and still manageable.

Exporters are more diversified in terms of foreign markets with an increase in ASEAN trade cushioning Malaysia against the wild export swings we used to see in the 1990s. At the same time, GDP growth levels appear to be hovering at around 4%, whilst official inflation figures, at 3%, are still manageable by emerging market standards. Out of 35 countries covered by Oxford Business Group , Malaysia is regarded one of the most stable investment destinations.

Yet there is a growing chorus of critics who say things could unravel. Most worrying perhaps is the 30% drop in foreign reserves seen over the past 12 months. The political appeal of reintroducing capital controls could seriously undermine investor confidence and trigger even sharper capital outflows.

A full-blown financial crisis despite strong balance sheets is possible unless the current downward ringgit trend can be reversed soon. In the short term the ability to bounce back from lows will depend on the fiscal and monetary response as well as a return to political stability.

However, a much bigger lesson is to be drawn from ongoing ringgit weakness. The initial loss of confidence had little to do with financial strength and liquidity and much more to do with the underlying structural weakness of Malaysia’s economic model.

High profits in resource sectors such as oil, gas and palm oil have during good years helped to mask rather limited progress in new sectors with significant potential: agriculture, tourism, downstream processing and services.

Blessed with natural resources and financial resources, Malaysia has arguably wasted the latest opportunity to put its economy on a solid footing to reach advance economy status by 2020. A disproportionate share of capital and credit was spent on speculative real estate projects in already saturated Klang Valley. Not enough attention was paid to high potential regions such as Sabah and Sarawak and connecting Malaysia more deeply with emerging ASEAN economies.

A resource-rich country, Malaysia has been able to gloss over a number of issues such as a lack of productivity, low participation of women in the workforce, restrictions on bringing in qualified staff and a loosely regulated, low-skill labour market.

To be sure the main distraction right now is the ongoing battle over political legitimacy. That must be reversed quite urgently to restore stability.

Ultimately though the weakness of ringgit is more about Malaysia’s relationship with the outside world and foreign and domestic investors. It is an issue of its external competitiveness. Historically, Malaysia has been ahead of its South-east Asian neighbours in attracting foreign businesses and investors. It remains an attractive destination thanks to its English-language proficiency, advanced infrastructure and well-developed financial system.

For now Malaysia can also safely say that its ASEAN neighbours Thailand and Indonesia have had an equally rough time when it comes to currency weakness. Both of these countries have unique challenges that are in some cases more insurmountable than Malaysia’s.

However, the Philippines and Vietnam are shining examples of economies catching up fast despite weakness in global markets. The two low-income nations have made tremendous progress in engaging with European trade partners (Vietnam EU FTA) and in building new business processing outsourcing (BPO) sectors that have helped to ensure remarkable growth rates independent of currency fluctuations.

In Malaysia the impression is that the ringgit continues to track the performance of oil and palm oil indexes, a sign of its heavy dependency that cannot be sustained in the long run.

The decline in the oil and crude palm oil prices coupled with significant outflows of capital should be viewed as a blessing in disguise to propel Malaysia towards a truly more advanced and sustainable business model.

As an open and trading economy, it will always have to endure the fluctuations in global markets. However, the time has come for policy makers and constituencies to embrace the reform agenda of economic diversification to put the economy on a sustainable path.

Paulius Kuncinas is Oxford Business Group Managing Editor for Asia

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