How My Plans To Retire In Malaysia May Be Foiled By The Strengthening Of The Ringgit

Within a short span of two months, the Malaysia Ringgit has appreciated against the Singapore Dollar by an alarming 5.4%, from a low of SGD 1 : MYR 3.509 on 12th June 2024, to a high of SGD 1 : MYR 3.319 on 5th August 2024, making MYR one of the best performing ASEAN currency in the past 6 months (Latest high of SGD 1 : MYR 3.3084 reached on 29th August 2024).  Although the exchange rate seems to stabilize between the range of 3.32 to 3.38 for now, MYR may continue to appreciate against the SGD once the FED materializes interest rate cut in US, and it did.  

To understand why this is inevitable, we may need a little economics lesson.  As I am not finance-trained, I shall engage the help of ChatGBT on this matter.

"The 'Impossible Trinity', also known as the 'Trilemma', is a concept in international economics that states that a country cannot simultaneously have all three of the following:

1)     A fixed exchange rate
2)     Free capital movement
3)     An independent monetary policy

A country can only achieve two out of these three objectives at the same time.

How Singapore Manages the Impossible Trinity

Singapore manages the Impossible Trinity by adopting a unique approach that focuses primarily on exchange rate management as the key tool of its monetary policy.

1)     Managed Exchange Rate Regime:

Singapore uses a managed float exchange rate system.  The Monetary Authority of Singapore (MAS) manages the Singapore dollar (SGD) against a basket of currencies of its major trading partners.  This allows the MAS to maintain a stable and competitive exchange rate, which is critical for Singapore’s export-oriented economy.

2)     Free Capital Movement:

Singapore maintains an open capital account, allowing free flow of capital in and out of the country.  This is essential for Singapore as a global financial hub, attracting foreign investment and facilitating trade.

3)     Monetary Policy Focused on Exchange Rate:

Instead of using interest rates as the primary tool for monetary policy, MAS focuses on managing the exchange rate within a policy band.  This band is reviewed periodically to ensure it aligns with the economic fundamentals and inflationary pressures.  By managing the exchange rate, MAS indirectly influences domestic monetary conditions, including interest rates and inflation.

Implications of This Approach

1)     Limited Independent Monetary Policy:

While MAS has some flexibility, it cannot fully control domestic interest rates independently since they are influenced by global capital flows and the managed exchange rate.

2)     Stability and Predictability:

This system has provided Singapore with a high degree of economic stability, low inflation, and a strong currency, contributing to its status as a major global financial center.

How Malaysia Manages the Impossible Trinity

Malaysia manages the Impossible Trinity by adopting a flexible approach that allows it to balance the trade-offs between exchange rate stability, monetary policy independence, and capital mobility.

1)     Managed Floating Exchange Rate:

Malaysia operates a managed float exchange rate regime, where the value of the Malaysian ringgit (MYR) is allowed to fluctuate based on market forces, but with occasional intervention by the Central Bank of Malaysia (Bank Negara Malaysia, BNM) to avoid excessive volatility.  This system provides some level of exchange rate stability while still allowing for adjustments based on economic conditions.

2)     Partial Capital Controls:

Malaysia maintains a relatively open capital account, but with some controls in place to manage the flow of capital.  For instance, while foreign direct investment (FDI) and portfolio investments are generally allowed, BNM has the authority to implement temporary measures to curb excessive short-term capital flows that could destabilize the financial system.  These controls are more relaxed compared to the strict capital controls imposed during the Asian Financial Crisis in 1998, but they still provide a mechanism to manage capital mobility when necessary.

3)     Independent Monetary Policy:

Malaysia retains a degree of monetary policy independence, allowing BNM to set interest rates based on domestic economic conditions.  The Overnight Policy Rate (OPR) is the main tool used to influence inflation and economic growth.  While the exchange rate regime may limit BNM's ability to fully control domestic monetary conditions, the managed float system provides enough flexibility to adjust interest rates in response to economic needs.

Implications of This Approach

1)     Monetary Policy Flexibility:

By adopting a managed float and retaining some capital controls, BNM has greater flexibility in setting interest rates to manage inflation and support economic growth.

2)     Exchange Rate Stability:

The managed float allows BNM to intervene in the foreign exchange market when necessary, providing a level of stability without fully committing to a fixed exchange rate.

3)     Controlled Capital Flows:

While capital is generally free to move in and out of the country, the ability to impose controls gives BNM a tool to protect the economy from destabilizing short-term capital flows."

So, based on the little "lesson" above, as Malaysia's central bank BNM kept the OPR stable at the 3.0% since May 2023, while US Fed continued to raise interest rates, it led to the funds outflow away from MYR into USD, leading to the depreciation.  SGD, on the other had, which had to remain stable against a basket of currencies, appreciated in line with the USD over the past year and a half, causing the SGD : MYR to hit a high of around 1 : 3.5.  However as the Fed's intention to lower interest rate becomes clearer, the stress against the MYR has gradually reversed in recent months.  

In addition, the influx of foreign investments into Malaysia helped to boost confidence on the MYR.  Prominent entities such as Apple, Microsoft, Google, Bytedance and Blackberry are some of the mega companies that are investing into Malaysia, bringing along with them large sums of foreign direct investments, including investments in infrastructure.  In addition, there are commitments from these mega companies to build and invest in data centers in Malaysia.  These actions will gradually restore investors' confidence in Malaysia and gradually help to support the MYR against global currencies, including SGD.  

However, there is a catch to this.  For MYR to gradually appreciate further, it is imperative for Malaysian Government and politics to remain stable.  Of course I have no crystal ball, and I do not know what lies ahead for Malaysia, but appreciation of MYR is a double-edged sword for me.  As I work in Singapore earning SGD, appreciation of the MYR against the SGD acts like an immediate "pay cut" for me.  However, appreciation of the MYR may also help to fight inflation in Malaysia, controlling the extent of price hikes on food, basic necessities and services.  This helps to make things a tad more affordable in Malaysia, even for local Malaysians.  

Hence I hope in the longer term, the exchange rate between SGD and MYR can eventually stabilize around 1 : 3.2, just like the times before Covid hit.  I believe this exchange rate will be the level that could allow me to comfortably Barista FIRE in Johor Bahru in a couple of years' time.  Nonetheless, a buffer is definitely still required for dividend investor like myself, and thus got to build up this buffer now more than ever, to prevent any unforeseeable "pay cuts" in future due to forex.  In the event that MYR gets to appreciate below 3.2 level against the SGD, then probably I will need to consider building up another dividend portfolio with listed companies on BURSA, or pumping monies into the Employees' Providend Fund (EPF) in Malaysia to compound till I am 55 years old.  Just got to remain flexible, and probably take a step at a time.  For now, Barista FIRE, here I come...!