Sunday, 19 March 2017

SingDollar vs Ringgit Malaysia



Last couple of weeks I received a Whatsapp message regarding Singapore Dollar (SGD) performance against our own Ringgit Malaysia (MYR).

Of course it came with demeaning comment such as sliding down the drain and the sender implied that Ringgit "underperformance" against SGD was because of economic and financial mismanagement by the government.

The fact that SGD has been appreciating against Ringgit since 1973 is an indisputable one but why it's been happening was always misunderstood by many people.

SGD and Ringgit performances are popularly viewed as a barometer of economic and financial management of both countries by their respective governments.

Some people use this fact as a proof that the Malaysian government has been mismanaging the economy, full of corruption and what not.

The problem with that notion is, it's not an apple to apple comparison because Singapore conducts its monetary policy by managing its currency movement while Malaysia conducts its monetary policy by targeting short term interest rate i.e. overnight policy rate (OPR) by buying and selling Ringgit via BNM bills in the interbank money market.

Monetary Authority of Singapore (MAS), Singapore's central bank (or sort of), manages exchange rates movement as its main tool to promote price stability (stable inflation rate) as a sound basis for Singapore's sustainable economic growth:
Singapore's Exchange Rate-Based Monetary Policy: MAS

SGD movements are determined by MAS. If SGD appreciates or depreciates against other currencies, it's because MAS allows it not because Singapore's government is managing the economy better than its Malaysia's counterpart per se.

As explained by the excerpt above, 

"Singapore dollar is managed against a basket of currencies of our major trading partners and competitors. The various currencies are assigned weights in accordance with the importance of the country to Singapore’s trading relations with the rest of the world. The composition of the basket is revised periodically to take into account changes in trade patterns."

Malaysia is one of Singapore's major trading partners and competitors. Malaysia is Singapore's third largest export destination after China and Hong Kong exporting goods worth US$37.8 billion or 10.9% of its total exports in 2015 and most importantly Malaysia is Singapore's third largest import source after China and United States.

Singapore has to import almost everything for consumption. Food, fuel, water and many other things are imported from overseas including (and especially from) Malaysia. It's on their best interest to make sure SGD keeps appreciating against Ringgit and other currencies to keep the cost of importing goods in check.


SGD/MYR

SGD/USD

SGD/EUR

SGD/CNY
SGD has been appreciating against Ringgit, US Dollar and Euro since more than 20 years ago while Chinese Yuan keeps its value against SGD because China's central bank, People's Bank of China also managed its currency using managed-float regime like MAS.

MAS has also been explicit about its stance on SGD movement. In every monetary policy statement MAS has been known to mention that it would maintain the policy of a modest and gradual appreciation of the S$NEER policy band. S$NEER is Singapore Dollar Nominal Effective Exchange Rate which is an index of Singapore Dollar against a basket of its major trading partners' currencies including Malaysian Ringgit (MYR):

MAS Monetary Policy Statement

There's no need for us to feel inferior just because our Ringgit has been depreciating against Singapore Dollar since we opted out from the currency union agreement with Singapore and Brunei.

There's certainly no need for us to look down upon ourselves and make fun of our policymakers because there's nothing rotten about our country's "financial" management. 

It's just that it's because the different approach taken by two monetary policymakers (Bank Negara and MAS) from different countries. 

The approach taken by MAS works for Singapore while the approach taken by BNM works for Malaysia.

We could not adopt MAS' approach by making sure Ringgit to keep appreciating because it would destroy our own economy. Exporters would feel the pinch, factories would be closed down, workers would lose jobs and many more.

Furthermore, controlling currency movement while keeping the capital flows freely would mean that we will need to surrender or give up our monetary independence to the other central banks like Singapore:

Singapore's Exchange Rate-Based Monetary Policy: MAS

Pegging Ringgit or fixing Ringgit has its own consequences. Whenever the foreign central bank (of the currency we pegged to) raises its domestic interest rate, we have to raise our interest rate too. That means higher interest rates on our mortgage and personal loan i.e. higher monthly installment.

That's exactly why the gulf countries and Hong Kong which pegged their currencies to US Dollar have to hike their domestic interest rates right after the Federal Reserve hiked theirs last week:

Four Central Banks Hike Rates - The Star

Hong Kong Central Bank Raises Rates Interest Rates After Fed Move - The Star

Had BNM pegged or fixed Ringgit (to USD especially) we would have seen a higher monthly repayment for our mortgage starting this month.

I hope my writing shed some light on why Ringgit has been depreciating against Singapore Dollar (actually it's the latter who keeps appreciating against the former because of the latter's central bank's policy) and why pegging or fixing our Ringgit is not the way to go for our country.

Again, don't feel down, humiliated or inferior just because our Ringgit depreciates. Count it as a blessing rather than a curse. Think it as an automatic stabilizer or cushion for our economy that had saved us from losing our jobs.

SGD keeps appreciating because its central bank's policy that fits their small and open economy, not because they are better than us or our economic policies or economic management are worse than theirs.

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