By G. Sharmila
Last Monday, the Singapore dollar hit a high of 2.8 to the ringgit and some are speculating that it will soon hit 3.0 against the ringgit. Others are skeptical. So, what is really driving the ringgit’s weakness against the Singapore dollar?
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Observers of the Singapore dollar-ringgit movements would have noticed that the Singapore dollar has been gradually appreciating against the ringgit over the past year (see Figure 1 below). However, it was last Monday’s high of 2.8 to the ringgit that had the market abuzz with excitement.
Manu Bhaskaran, chief executive officer of Centennial Asia Advisors Pte Ltd, an independent research and advisory firm based in Singapore, said that it is not so much the Singapore dollar appreciation as the ringgit depreciation.
“The Monetary Authority of Singapore (MAS) has moderated the pace of the Singapore dollar appreciation against a basket of trading partners’ currencies since January this year, in line with low inflation and rising risks to growth in Singapore.
“Our view is that inflation will turn out lower than policymakers assume and that the risks to growth will be higher. In that context, our best guess is that MAS will have to further moderate its exchange rate-based policy in October, perhaps shifting to a policy of no appreciation of the Singapore dollar in trade weighted terms,” Manu told KINIBIZ via email.
It is worth remembering in light of the above, that MAS has a unique monetary policy when it comes to handling the Singapore dollar. Essentially, what it does is allow the Singapore dollar to appreciate or depreciate within a certain band, against a basket of weighted currencies. Therefore, MAS prefers to allow the currency to appreciate. (For more details on MAS’ exchange rate monetary policy, see Table 1).
Suresh Kumar Ramanathan, former head of interest rate and foreign-exchange (FX) strategy at CIMB Group, concurred with Centennial’s Manu that the issue is more of the ringgit’s depreciation rather than the Singapore dollar’s appreciation.
“The factors that drive this erosion in value are the weak economic policies of the government, a weak ringgit policy, instead of a strong currency policy that is advocated by Singapore,” he told KINIBIZ via email.
“The current weakness in the ringgit is mainly due to a decline in FX reserves, not international reserves. The FX reserves are the most liquid component of international reserves and this has a direct impact on the M1 money supply in the economy. As the central bank intervenes in the FX market, FX reserves decline and M1 money supply shrinks, limiting the liquidity in the system,” he added.
In a report dated June 15, Suresh explained that M1 measures the most liquid components of money supply, as it contains cash and assets that can quickly be converted to currency.
“As price pressures rise and tighter monetary conditions beckon, the ringgit in real effective exchange rate terms has become increasingly undervalued. No surprise as to why the ringgit has continued to underperform against the Singapore dollar and the Chinese yuan of late.
“The latter are both facing deflationary pressures, but in the case of ringgit, it’s mainly due to the link between FX reserves and M1 and the accompanying inflationary pressures in the economy,” he said in the report. (For a better idea of the relationship between the FX reserves and M1 supply, see Figure 2 below).
Wong Chee Seng, strategist, FX and rates, markets at AmBank Group, also holds the view that the problem is the ringgit’s inherent weakness.
“The strengthening of the Singapore dollar against the ringgit is driven by a combination of forces. Firstly, we note the rising risk premium in Malaysian market as Ringgit on depreciation bias, high foreign ownership of government bonds, risk of fiscal slippage and rising inflation expectations,” he told KINIBIZ via email.
Then there is the concern towards the possible downgrade of Malaysia’s sovereign rating by Fitch Ratings, where the rating agency said Malaysia’s credit ranking sits “more naturally” in the “BBB” range, Wong pointed out, noting also that currently Fitch has rated Malaysia with an “A-” of negative outlook.
“With the secular strengthening of the US dollar, all currencies will likely trade with a depreciation bias, including the ringgit and Singapore dollar. As MAS’ strategy of gradual appreciation of the Singapore dollar, rising wage pressure, and bigger FX reserves, it raises a stronger demand for the currency.
“Safe-haven demand is another supporting factor for the Singapore dollar to strengthen against all high beta currencies, including the ringgit. We are envisaging the Singapore dollar to strengthen over the short to long term on a gradual basis,” he added. (See Figure 3 and 4 for a look at the Singapore dollar’s performance against the US dollar and that of the US dollar against the ringgit).
Commenting on the outlook for the ringgit, Suresh Kumar said: “Our US-dollar-against-ringgit view is 3.65 in the third quarter and 3.7 in the fourth quarter, but the weakness of the ringgit versus the Singapore dollar will remain, not ruling out 2.9 and 3.0 levels for the ringgit versus the Singapore dollar in both quarters.”
“Bear in mind, the Singapore dollar/ringgit moves have detached itself from US dollar/ringgit moves and US dollar/Singapore dollar moves. Its trading is based on its own sentiment rather than being affected by the cross rates,” he explained.
Centennial’s Manu was skeptical, however. “A further sharp rise to 3.0 is highly speculative. Assuming a strong US Dollar, the Singapore dollar will probably depreciate against the US dollar but appreciate modestly against a basket of currencies of its main trading partners. So a lot will depend on what happens to the ringgit. If there are no further political or fiscal concerns, the ringgit should stabilise, especially as it is almost certainly undervalued right now,” he said.
While the experts have differing views on the direction of the Singapore dollar-ringgit relationship, what seems clear is that the weakness of the ringgit against the Singapore dollar will stick around for awhile yet. In our next article, we examine why investors are selling down the ringgit and why some of their concerns are overdone.
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