‘Sharp depreciation of ringgit a blessing’

by **Cals** Tue 12 Jul 2016, 00:45

‘Sharp depreciation of ringgit a blessing’

By Ahmad Naqib Idris / The Edge Financial Daily | July 11, 2016 : 10:14 AM MYT

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This article first appeared in The Edge Financial Daily, on July 11, 2016.
KUALA LUMPUR: The jaw-droppingly sharp depreciation of the ringgit against most major currencies has raised concerns among most Malaysians, but Franklin Templeton is of the view that the weakening of the local currency is indeed a blessing to the country’s economy.
It opines that the depreciation of the ringgit has helped to mitigate the impact of the decline in commodity exports as a result of soft commodity prices.
“A flexible exchange rate was the first line of defence: The authorities allowed the ringgit to depreciate by about 25% against the US dollar, to cushion the adverse terms of trade shock.
“The depreciation helped to limit the deterioration in the current account balance, which remained comfortably in surplus, despite the severity of the commodity price decline,” Templeton Global Macro chief investment officer Dr Michael Hasenstab commented in the research report entitled “Global Macro Shifts, Emerging Markets: Mapping the Opportunities”.
The research report noted that Malaysia had learned its lessons from the 1997 Asian financial crisis, with the country’s flexible exchange-rate regime, diversified economy and prudent macroeconomic policies.
Hasenstab pointed out the severe impact of low commodity prices on Malaysia’s economy, noting that commodity exports contracted 30% in 2015, while the trade balance in commodities fell more than 2% in 2015, from 2013.
He said the economic shock brought by lower commodity prices was also mitigated by the diversification in the nation’s economy and export sector, with manufacturing and services accounting for 80% of the economy. He added that the country’s commodity exports had also seen some diversification, indicated by energy’s contribution of 65% of total commodity exports.
“As commodity prices fell, resources shifted from the commodity sector to manufacturing exports, including electronics. When oil prices decline, Malaysia’s economy reacts by reallocating resources to non-commodity sectors, boosting the country’s export performance and improving the non-energy trade balance,” the research report said.
The slump in commodity prices had significantly affected the government’s income, as most of its non-tax revenue is oil-related, which led to the government’s swift introduction of the goods and services tax (GST) and cuts in fuel subsidies to make up for the loss in income.
“In April 2015, it introduced the GST, which increased indirect tax revenue by more than 1% of GDP (gross domestic product) through 4Q15 (fourth quarter of 2015). At the same time, fuel subsidies were reduced to below 2.5% of GDP in 2015, from more than 3.5% the year before, in large part due to fuel price deregulation.
“The sum of the two measures resulted in a fiscal balance correction of about 2.5% of GDP, and helped reduce the fiscal deficit to 3% of GDP last year, from over 5% of GDP five years ago,” said Hasenstab.
He added that the sound fiscal policy put in place had allowed for low and stable inflation, with the consumer price index expanding at a steady pace of close to 2%, despite the implementation of the GST and the weak ringgit.
“The monetary policy stance has been carefully calibrated, allowing liquidity to keep expanding at a sufficient pace to support domestic demand growth. Overall GDP growth was 5% in 2015, lower than the previous year’s 6%, but still robust.
“Given the ongoing fiscal consolidation, some additional slowdown is likely this year, but the long-term prospects remain very healthy,” he said.
He also noted that Malaysia is among the top in the region, in terms of transparency.
“Malaysia still scores highly with respect to transparency — second only to Singapore in Southeast Asia, implying that corruption is seen as contained rather than endemic.
“However, we do see some threats going forward, including the current political situation making implementation of structural reforms more difficult in the future,” he said.
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