KUALA LUMPUR (Sept 27): The World Bank said on Tuesday (Sept 27) there is no quick and easy fix for the ringgit's weakness against a strengthening US dollar as the bulk of Malaysian traders are invoiced in US dollar, hence, the only thing that Malaysia can do now is to focus on the fundamental economic issues, which include structural reforms that the nation needs.
"Bank Negara Malaysia is doing what it can with the tools in hand," World Bank lead economist for Malaysia, Apurva Sanghi, said at a virtual press conference on Tuesday in conjunction with the publication of the latest World Bank East Asia and the Pacific Economic Update report.
At the ringgit's current exchange rate above 4.6 against a strengthening US dollar due to the US' rate hike anticipation to fight inflation, the depreciating ringgit is a concern because most of Malaysia's trades are denominated in US dollar, Apurva said.
"Now, Malaysia is not alone. Other countries have similar numbers, but it does speak [of] the power of the US dollar, with 80% of [global] trade [denominated] in US dollar," he said.
Apurva fielded reporters' questions together with his colleagues — World Bank East Asia and Pacific chief economist Aaditya Mattoo and World Bank country manager for Malaysia Yasuhiko Matsuda.
Apurva said the strength of the ringgit, which has depreciated to above 4.6 against the US dollar currently from 4.1392 over the last one year, depends on how well the Malaysian economy performs.
He said Malaysia's structural reforms which include fiscal and education initiatives besides the improvement in the country's investment climate are all crucial to enhance the country's productivity and competitiveness.
For now, a weaker ringgit versus a strengthening US dollar raises the spectre of inflation considering that a portion of Malaysia's imports is denominated in US dollar.
Mattoo said although Malaysia does not have high foreign currency-denominated debts, the country is not immune to the US' rising interest rates and the US dollar's strengthening.
"A lot of commodities are priced in US dollar, so when your currency gets weaker relative to the US dollar, that also contributes to inflation pressure.
"Fortunately, for most of the countries in the region, they have relatively low amounts of debts denominated in foreign currencies and debts which are at variable interest rates, so they are feeling less negative shock.
"But nobody is immune to the pressure caused by increasing interest rates," he said.
Meanwhile, Matsuda said that while political uncertainty is a factor of concern for Malaysia's economy, it is however not the top issue that is seen curbing the country's future economic growth.
"The upcoming [Malaysian] Budget 2023 will be introduced by the government with a limited tenure. Sooner or later, there will be an election. Clearly, it is an element of concern for the economy. But compared to other things that are going on, especially on the global front, I wonder whether it (political uncertainty) is really a top concern," he said.
Malaysia, which plans to table Budget 2023 in Parliament on Oct 7, is also scheduled to hold its 15th general election (GE15) in 2023.
"In the end, none of us know where the country's economy is going to land. There are just too many uncertainties. [But] we do know that in the medium to long run, there are certain structural reforms that the country needs, especially on the fiscal front, foreign as well as domestic investments, reforms on the labour market, education system and so on.
"These is the usual set of challenges that most countries face, but because Malaysia has been relatively successful compared to other middle-income countries, the bar is higher for the kind of things that the country needs to clear, so that it gets into the next level of development," he said.
Matsuda said implementation of structural reforms requires a stronger Malaysian government that has a firmer mandate from the people.
"These (reforms) require, some of them at least, management on political and economic aspects, because [a] difficult reform has winners and losers. Tightening the belt too soon could stifle the [economic] recovery, but doing it too late could lead to missed opportunities.
"This is more of an art than science, just like the question of when is the right time to introduce [the] GST (goods and services tax) or any other tax measures. I think there is no clear answer.
"But I think the country needs to be ready when the opportunity arises. The reforms can be introduced relatively quickly. There is quite a bit of work to do in terms of building up the understanding and consensus," Matsuda said.