Malaysia’s currency hit a new low against the Singapore dollar on Feb. 21, trading at S$1 to RM3.57, the lowest ever.

The previous low was reached on Feb. 19.

Perhaps more alarming is that this isn’t the first time a record was broken this year, or even this month.

You might be wondering: why exactly is the ringgit weakening against the Singapore dollar?

What Malaysia's central bank says:

The fall in the ringgit prompted a response by the governor of Bank Negara Malaysia, Abdul Rasheed Ghaffour, who insisted that the ringgit’s “weakness is temporary”, as reported by Bernama.

The first thing to know is that the ringgit is weak against the U.S. dollar, and it's that weakness that is driving its position with the Singapore dollar, rather than any particular economic situation between Singapore and Malaysia directly.

Ghaffour insisted that the “the recent performance of the ringgit… has been influenced by external factors”, as quoted by MalaysiaKini.

Such factors included market adjustments to changing U.S. interest rate expectations, geopolitical concerns, and uncertainty surrounding China’s economic prospects.

Low demand due to low exports

Bloomberg explained that the value of the ringgit is being affected by falling demand for exports, and that Malaysia’s main trading partner, China, is experiencing its own economic woes.

This had contributed to Malaysia experiencing ten consecutive months of declining exports, which also hurt Malaysia’s economic growth, further weakening the currency.

Bloomberg said that the ringgit was about two per cent from its lowest ever level against the U.S. dollar, during the 1998 Asian financial crisis.

In 1998, then-prime minister Mahathir Mohammad pegged the ringgit to the U.S. dollar, something that the government of Anwar Ibrahim has rejected doing.

Steven Sim, one of Malaysia's two deputy finance ministers, said that the situation in 1998 was very different from the present day, in that Malaysia is better placed now, as reported by the Malay Mail.

Furthermore, pegging the ringgit to another global currency, such as the U.S. dollar, would limit the Malaysian government's policy, and put more financial pressure on Malaysians.

It might even require the reintroduction of capital control measures, negatively affecting investor confidence, and at very high cost.

Political instability

But several observers also cited domestic factors for the ringgit’s weakness, with Bloomberg additionally citing worries over Malaysia’s political stability.

Malaysian Prime Minister Anwar Ibrahim reportedly faced an attempt by the opposition to oust him in December 2023, although Anwar himself played down such rumours.

The New Straits Times also cites Malaysia’s own lack of policy clarity, saying that the failure to introduce promised reforms, such as subsidy reductions, as affecting growth.

On Feb. 16, Nikkei reported that Malaysia’s central bank said that Malaysia had missed its four to five per cent Gross Domestic Product growth target, only managing to grow 3.7 per cent.

U.S. interest rates

Malaysian economic observers are also watching potential moves by the U.S. Federal Reserve.

Nikkei reported that the ringgit was facing pressures similar to that of the Thai Baht and South Korean Won, citing the increasing cost of dollar-denominated debt as affecting the value of these currencies.

The Federal Reserve was expected to announce cuts to interest rates throughout 2024, but has yet to do so, and Nikkei reports that expectations that it will do so in March has reduced from 80 per cent in January to 10 per cent currently.

The Financial Times reports interest rate cuts are looking less and less likely in the immediate future.

Interest rate cuts will make borrowing money cheaper and are usually used as lever to spur economic growth, although usually at the cost of higher inflation.

U.S. interest rates unlikely to come down soon

Many factors account for a reluctance to cut interest rates, notably a stubbornly high inflation rate in the U.S.

But inflation is not the only factor, with some analyst observing that other indicators of the U.S. economy's health are in a good place, lowering the incentive to cut rates.

One key indicator, employment, is doing especially well, with the unemployment rate near historic lows, low jobless claims, and a healthy job growth rate.

It was expected at the end of 2023 that the U.S. would cut interest rates three times in 2024. However, analysts that the FT spoke to indicated that two rate cuts were the most they expected, if any at all.

The FT even reported former Treasury Secretary Larry Summers saying there was a small chance that the U.S. would even increase rates.

The reasoning given was simple: if the economy was doing well now, what is the need for interest rate cuts?

Singapore as a regional reserve

Singapore, for its part, has adhered closely to the U.S. Federal Reserve for its own interest rates, according to the New Straits Times.

Singapore's central bank equivalent, the Monetary Authority of Singapore (MAS), does not actually tweak domestic lending rates, but instead adjusts the exchange rate policy band, known as the Singapore dollar nominal effective exchange rate or S$NEER.

In end-January 2024, MAS maintained the rate of appreciation of the Singapore dollar, in a bid to curb inflation. In a statement, it said:

"Barring any further global shocks, the Singapore economy is expected to strengthen in 2024, with growth becoming more broad-based.

MAS Core Inflation is likely to remain elevated in the earlier part of the year, but should decline gradually and step down by Q4, before falling further next year.

1Accordingly, current monetary policy settings remain appropriate. The sustained appreciation of the policy band will continue to dampen imported inflation and curb domestic cost pressures, thus ensuring medium-term price stability.

MAS will therefore maintain the prevailing rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred."

This, coupled with the view that the Singapore dollar is a kind of regional “safe haven”, has kept a high demand for the Singapore dollar, especially in times of economic uncertainty, according to NST.

Malaysian economists expect the situation to improve in the later half of 2024, if expected interest rate cuts in the U.S. are enacted.

But that rate cut is now less certain than before.

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Top image by Mothership