Moving into 2015, the Malaysian Ringgit (MYR) is at its weakest against the US Dollar (USD) in nearly 5 and a half years. At the time of writing, 1 USD is worth about 3.6050 MYR, which is nearly 13% weaker than it was 6 months ago when it reached a low of 3.1415 MYR. What had transpired during this period of time?
The Ringgit’s rapid depreciation was largely driven by a rapid and continuous decline in oil prices, a surge in the strength of US Dollar and ongoing domestic concerns, such as fiscal challenges and vulnerability to foreign capital outflows.
The Ringgit is extremely vulnerable to fluctuations in oil prices given Malaysia’s status as a net oil exporter in the region and its government derives close to 30% of its revenues from the oil and gas sector. Thus, falling oil prices will lower its oil export revenues and any prolonged slump in oil prices could raise market concerns on the government’s fiscal consolidation efforts to trim its fiscal budget deficit to the revised target of 3.2% in 2015.
Foreign capital outflows
The Ringgit is also particularly sensitive to foreign capital outflows as foreign investors hold close to 40% of its outstanding public debt, one of the highest ratios in the region. International reserves have dropped sharply from USD131.9 billion as at 14 July 2014 to USD110.5 billion as at 13 February 2015.
All these developments have resulted in negative impact on its economic growth and currency. As a result, Ringgit is nearly 13% weaker than it was 6 months ago.