Beyond the gloom of the weak ringgit today, many wonder just when the local currency value can rise again and if it will ever return to the lofty level of around RM2.50 to the US dollar charted back in 1997.
Those who are even more hopeful may also think the ringgit could some day retrace its October 1978 record high of RM2.10 against the greenback (see historical chart below).
Pessimists will say the weak ringgit is here to stay until and unless Malaysia is totally rid of its national debt – which is now just shy of 55% against gross domestic product (GDP) – and unlikely to disappear anytime soon.
Based on the latter premise, it is then quite astonishing how the US dollar is climbing so rapidly against most currencies around the world – given that the American national debt to GDP is now at 102%!
The trick here seems to be trade cash flow that underpins the American government’s capability to pay off its colossal debt. And judging from how most of the world’s top revenue-earning firms – from Apple to Google – are American, the US dollar has a lot of legs to tap dance around debt demands.
This widespread confidence in the easy availability and convertibility of the US dollar is what’s propping up the greenback – and fuelling demand for the US currency even as funds look to flow back to American shores to take advantage of the very small likely interest rate hike expected of the Federal Reserve.
The fund backflow is, however, seen as a short-term gain to take advantage of spikes in the US stock market and will probably flow around the world again weeks later to chase other profit factors.
Based on this outlook, the ringgit won’t stay weak for long – everyone from the World Bank to local economists agree that Malaysia’s economy is strong enough to offer to weather the temporary exodus of US dollars and is attractive enough for the American funds to return within a matter of weeks, if not months.
But that factor alone isn’t enough to drive the ringgit back to the RM2.50 level – other forces are at play too, specifically oil-based revenues.
While the Malaysian government has said the country is actually a net importer oil, the general perception is otherwise due to the nation’s extensive higher grade crude oil and gas exports.
This means Malaysia’s revenue will go up as the crude oil price rises, and so will the ringgit. This was the trend already seen two to three years back when the ringgit temporarily breached the RM3 mark to trade at around RM2.94 at one point against the US dollar.
The only real way for the ringgit to rise again significantly to historical highs is if the US dollar plunges – something that actually happened back in 2007-8, but still wasn’t seen as enough to boost the ringgit’s value.
What needs to happen is a refocus on the huge American debt mountain – a situation that has often been brushed aside dismissively, but may shift back into focus due to the stuttering economy in China.
China arguably holds the largest amount of US debt – Treasury bills or T-bills – as its financial reserves. China may soon need to cash in on the T-bills as its economy is now going through a critical stage where revenue from its mature areas have yet to be able to fund the development of its largely rural zones.
It is a situation akin to what Japan went through over the past four decades – which transformed the Land of the Rising Sun from a cash-rich nation to one with a debt pile now. The US too has gone through the same cycle, as have many developed economies.
So when China starts selling T-bills to fund its own national development – that’s when the ringgit will really soar.
As to how soon that will happen, it’s anyone’s guess – though some optimists feel China may need to start selling T-bills as soon as 2018.
In short, the fate of the ringgit’s value isn’t really in Malaysian hands any more. There are three parties who hold all the cards now – the US Fed, China’s ruling Cabinet and possibly Saudi Arabia, which has the biggest influence on crude oil price if it ever decides to cut its output.
By FRANCIS NANTHA, Source - therakyatpost.com
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