While Johor menteri besar Onn Hafiz Ghazi said the weakened ringgit would attract Singaporeans to come to Malaysia and spend, state opposition leader Liew Chin Tong said there was a need for a long-term plan to keep Malaysians home.

Though the ringgit appreciated slightly on Thursday against the Singapore dollar, many might wonder if the currency could ever fully close the gap.

FMT spoke to Yeah Kim Leng of Sunway University and International Islamic University Malaysia’s Ahamed Kameel Mydin Meera to take a look at the factors behind the weakening ringgit and its future prospects.

What causes currencies to weaken or strengthen?

Yeah said the exchange rate adjusts continuously to changes in relative economic and financial conditions, market sentiment and investor confidence.

Short-term fluctuations aside, he said the underlying exchange rate trend reflected the fundamental strength of the economy, especially its growth, competitiveness and productivity.

Kameel said exchange rates, like commodity prices, were primarily determined by demand and supply, which in turn was influenced by imports and exports of goods and services, as well as demand for instruments in capital markets.

“It is also determined by arbitrage opportunities that might exist due to sudden shifts in demand or supply for any other currencies. Currency speculators and manipulators also create artificial demand or supply.

“Exports and imports naturally affect the ringgit’s exchange rate. With the prices of palm oil and petroleum rising, this could indeed cause a fall in demand for these commodities, thereby causing the ringgit to fall too.”

How does a weak ringgit affect regular Malaysians?

A weaker ringgit naturally means that imports would be more expensive and will lead to higher imported inflation, according to Yeah, while a strong local note means higher purchasing power when abroad.

He pointed out that Malaysia had a high food import bill, which would increase further with a weakened ringgit.

“While a temporarily weakened ringgit will make it cheaper for foreigners to acquire Malaysian assets, a continuously declining ringgit will deter foreign investors as the repatriated income will lose value upon conversion.”

Why is the S$ doing so well? How much higher could it go?

Yeah said Singapore’s currency was benefitting from a combination of a safe haven status, a risk-off environment amid rising global uncertainties, and tightening by the city-state’s monetary authority that used the exchange rate as a tool.

For “safe haven currencies” like Singapore’s, he said they could further appreciate in view of a further escalation in the Russia-Ukraine war, the rise in inflation and economic uncertainties, as well as policy differences between developed and developing nations.

“Under such conditions, the currency market is expected to remain highly volatile. It is not unusual for currency movements of 10% to 20% during such volatile periods compared to annual changes of 2-3% under normal conditions.”

Can the ringgit ever close the gap?

Yeah said in order to close the gap, Malaysia’s economy must grow at a much faster rate than its neighbour’s while achieving higher productivity growth.

This change can only be achieved through industrial transformation, technological upgrading and a shift to high-value activities across all economic sectors.

“But it will be difficult for the ringgit to achieve parity with the Singapore dollar given the wide gap in income per capita, its well-managed economy, its role as an international centre for various activities, and its advanced nation status.”

Kameel believed that the ringgit would “never come back to parity” with the Singapore dollar, unless the world were to go back to some form of gold standard.

While this was possible, he said it was unclear if this could materialise in the near future.

Nonetheless, he pointed out that China launched the gold-backed petro-yuan in 2017, while Russia recently made its ruble covertible to gold at 5,000 ruble per one gram, in view of economic sanctions.

“Nations are gradually realising that the way to observe stability in exchange rates is by pegging their currency to gold. If Malaysia becomes part of this arrangement one day, that would see the ringgit on par with the Singapore dollar within a fixed-exchange-rate regime.”