Explained Why The Singapore Dollar Is So Strong Against The Ringgit

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Malaysia and trade dependent Singapore took different routes towards managing their economies in 1973, and the currencies diverged too.PETALING JAYA: The ringgit and the Singapore dollar were once at par and freely interchangeable. That ended in 1973. Since then, the value of the ringgit has sunk, reaching a new low in June of RM3.4384 to one Singapore dollar.
How did this come about? FMT looks at the different economic and fiscal strategies that contributed to the ever-widening gap between MYR and SGD.
How it began
In May 1973, the government withdrew from a currency interchangeability agreement with Singapore and Brunei by which the currencies of the three countries were at par value and could be freely interchanged.
Malaysia’s decision to leave the agreement was influenced by international factors and domestic economic conditions, says economist Yeah Kim Leng of Sunway University.
A system of fixed exchange rates between major currencies broke down after the US left the gold standard in the 1970s.
“Malaysia’s priorities at that time were to have an independent monetary policy and a flexible exchange rate over tied currencies for domestic development.
“However, Singapore, a highly open trading nation, uses the exchange rate as the main policy instrument,” said Yeah, a member of the finance ministry advisory committee.
Fall of the ringgit
Afzanizam Rashid, chief economist of Bank Muamalat Malaysia Bhd, told FMT the ringgit’s continued depreciation against the Singapore dollar is due to the different approaches of the two countries towards managing inflation.
The Monetary Authority of Singapore will intervene in the foreign exchange market to ensure the Singapore dollar’s exchange rate with the US dollar is kept within a policy band, he said.
Singapore finds it necessary to manage the exchange rate as the island nation is trade-dependent and relies on imports to compensate for its lack of natural resources.
“By controlling currency they have a better control of inflation,” he said.
However, Malaysia uses price control and subsidies as the tools to contain inflation.
“Let’s say you want to change the method to interest rate targeting, the chances are whatever you do in your exchange rate may not be effectively transmitted to your inflation control,” Afzanizam said.
Negative consequences
Given the higher value of the Singapore dollar, it is not surprising that a large number of Malaysians cross the Johor straits to earn a Singapore salary as the higher exchange rate is an opportunity to increase their net savings.
There are about 1.86 million Malaysians who live abroad, of whom about 1.1 million are in Singapore.
Afzanizam said other than losing talent to Singapore, the weak ringgit will also lead to “imported inflation”, for the most part in Malaysia’s agriculture and food sector.
“We have continuously been importing our food from abroad, so the imported inflation can be quite visible when our currency depreciates, especially on items that are not controlled or subsidised,” he said.
“Of course, those who have sent their kids abroad have to fork out more cash for their tuition fees and living expenses.”
No easy way out
Yeah said there is no “silver bullet” solution that will close the gap between the ringgit and the Singapore dollar in a short time as currency strength is intricately related to a nation’s economic fundamentals.
“When the country is able to increase its income and output, and increase productivity in a collected manner, and with stronger underlying fundamentals such as trade surplus, strong fiscal position and rising reserve, of course the ringgit will be rightly strengthened against SGD,” he said. - FMT

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