Explained: Why the Singapore dollar is so strong against the ringgit?

The Malaysian ringgit and the Singapore dollar were once equivalent in value and freely exchangeable, but this changed in 1973. Since then, the ringgit's value has steadily declined, hitting a new low in June when it reached RM3.4384 against one Singapore dollar.

What led to this situation？ WikiFX delves into the various economic and fiscal policies that have played a role in the widening gap between the MYR and SGD.

How it began

In May 1973, Malaysia made the decision to exit a currency interchangeability agreement it had with Singapore and Brunei. Under this agreement, the currencies of these three nations were of equal value and could be freely exchanged.

Economist Yeah Kim Leng, affiliated with Sunway University, attributes Malaysia's departure from this agreement to a combination of international influences and domestic economic conditions. During the 1970s, the global financial landscape was undergoing significant changes, primarily due to the United States' abandonment of the gold standard. This shift in international monetary dynamics played a role in Malaysia's decision-making.

At that time, Malaysia had specific priorities. They aimed to establish an independent monetary policy and implement a flexible exchange rate system, which they believed would be more conducive to their domestic development goals. In contrast, Singapore, known for its highly open and trade-dependent economy, continued to prioritize its exchange rate as a primary policy instrument. Yeah Kim Leng serves as a member of the finance ministry advisory committee.

Fall of the ringgit

According to Afzanizam Rashid, the chief economist at Bank Muamalat Malaysia Bhd, the ongoing depreciation of the ringgit compared to the Singapore dollar can be attributed to the differing strategies employed by the two nations in tackling inflation.

He explained that the Monetary Authority of Singapore takes proactive measures to intervene in the foreign exchange market, ensuring that the Singapore dollar's exchange rate with the US dollar remains within a predetermined policy band.

Singapore prioritizes the management of its exchange rate due to its status as a trade-dependent island nation that heavily relies on imports to offset its scarcity of natural resources.

This approach of controlling the currency provides Singapore with a more effective means of managing inflation, according to experts.

In contrast, Malaysia employs price control mechanisms and subsidies as the primary tools to curb inflation within its economy.

Afzanizam Rashid highlights that attempting to switch to an interest rate targeting method could potentially result in limited effectiveness in transmitting exchange rate adjustments to achieve inflation control in Malaysia's context.

Negative consequences

Given the stronger Singapore dollar, it comes as no surprise that a significant number of Malaysians venture across the Johor straits in pursuit of higher-paying jobs in Singapore, capitalizing on the favorable exchange rate to bolster their savings.

Approximately 1.86 million Malaysians reside abroad, with roughly 1.1 million of them being in Singapore.

In addition to talent emigration to Singapore, the depreciated ringgit can also result in what is known as “imported inflation,” particularly impacting Malaysia's agriculture and food sectors.

Malaysia has been consistently reliant on imported food, making imported inflation particularly noticeable when the local currency weakens, especially on items that aren't subject to price controls or subsidies.

Furthermore, individuals who have sent their children overseas for education must allocate additional funds for tuition fees and living expenses due to the weakened ringgit.

No easy way out

Yeah emphasized that there isn't a quick-fix solution that can rapidly bridge the gap between the ringgit and the Singapore dollar because currency strength is intricately tied to a nation's economic fundamentals.

He explained, “When a country can boost its income and production, enhance productivity collectively, and possesses robust underlying factors like a trade surplus, a solid fiscal position, and increasing reserves, then the ringgit will naturally strengthen against the SGD.”