Why Is The Singapore Dollar (SGD) Constantly Appreciating Against The Malaysian Ringgit (MYR)?

Many residents of Singapore frequently visit Johor Bahru in Malaysia for retail shopping and to benefit from the lower prices, securing great deals.

A key advantage of shopping in Malaysia is the strength of the Singapore Dollar. Recognised as a stable currency in the Asian region, the Singapore Dollar (SGD) is often likened to the Swiss Franc of Switzerland, serving as a reliable asset in fluctuating markets.

Since Singapore’s independence in 1965, when the Singapore Dollar was equivalent to the Malaysian Ringgit (MYR) on a one-to-one basis, the Singapore Dollar has consistently gained strength against the MYR.

Presently, the Malaysian Ringgit is near its lowest value against the SGD, requiring 3.5 MYR for one SGD. This significant difference can be attributed to three main factors.

#1 Weaker Economic Data For Malaysia

In Asia’s emerging markets, the strength of a country’s currency is typically linked to how well its economy is performing. Unfortunately, Malaysia’s economy has simply not grown as fast as Singapore ever since the 1960s.

In fact, in the second quarter of 2023, Malaysia’s GDP growth reached its lowest point in almost two years, registering an annualised rate of just 2.9%. Adding to Malaysia’s economic concerns is the fact that its largest trading partner, China, is also experiencing economic weaknesses. This has led to a continuous decline in Malaysian exports over seven consecutive months, with the trend extending through September 2023.

The primary factors behind this decline in exports are slowing global demand for electronics and falling commodity prices. Malaysia specialises in the production and export of these goods, particularly in the oil and gas sector. When global demand for electronics weakens and commodity prices drop, it directly affects Malaysia’s export revenues.

As a result of these economic challenges, the MYR has also weakened. When investors and traders perceive economic risks and uncertainties, they tend to reduce their holdings of the MYR, leading to its depreciation relative to other currencies like the SGD. This economic weakness, combined with external factors affecting exports, contributes to the depreciation of the MYR against the SGD.

#2 Looser Monetary Policy In Malaysia

Conventional economic theory suggests that during economic weakness and recession periods, a country’s central bank should maintain relatively low-interest rates to stimulate economic activity.

Conversely, when an economy is strong and performing well, as is the case in the United States with the Federal Reserve, higher interest rates are typically preferred to control inflation and manage economic growth.

In Malaysia’s context, the central bank, known as Bank Negara Malaysia, has maintained its interest rate at 3.0% since mid-July. This decision to keep interest rates steady is in response to the ongoing economic weaknesses within Malaysia. However, this stance has created another challenge, which is a significant interest rate differential when compared to the United States, where the Federal Reserve’s Fed Funds Rate is between 5.25% to 5.50%.

This interest rate differential between Malaysia and the United States has prompted capital outflows from Malaysia. Foreign investors seeking stable yields in an uncertain global market have been moving their investments away from Malaysia. These outflows have impacted various financial markets in Malaysia, including its stock and bond markets.

As a result of these economic and financial developments, the MYR has experienced depreciation. In fact, it is currently the second-worst-performing currency in Asia in 2023, with only the Japanese Yen performing worse. This decline in the value of the MYR can be attributed to the interest rate differential, which has encouraged foreign investors to seek higher yields elsewhere, ultimately affecting Malaysia’s currency.

#3 A Stable Singapore Dollar (SGD)

While the first two reasons had to do with Malaysia’s economic weakness, the final reason has also allowed the SGD to strengthen against the MYR.

The strength of the SGD in 2023 can be understood with two key factors: 1) the resilience of Singapore’s financial markets and 2) its consistent, stable monetary policy. Despite the US Dollar offering higher interest rates, the Singapore Dollar has remained relatively stable in its exchange rate against the US Dollar.

One reason for this stability is that Singapore tends to attract significant interest from investors during times of volatility and uncertainty, whether on a regional or global scale. Recent events, such as the ongoing Ukraine-Russia conflict, fluctuating oil prices, geopolitical tensions between the US and China, and the recent war involving Hamas and Israel, have heightened investor caution and anxiety.

Singapore’s reputation as a stable financial hub in Asia has made it a preferred destination for large investments. As a result, substantial amounts of capital have flowed into the city-state, bolstering the strength of the SGD.

Also, Singapore’s central bank, the Monetary Authority of Singapore (MAS) also aims to maintain price stability so that it’s conducive to the sustained growth of the economy. Rather than use interest rates, MAS manages this via the exchange rate. This is done by managing the Singapore dollar nominal effective exchange rate (S$NEER), which is managing the Singapore dollar against a trade-weighted basket of currencies.

Read Also: Coping With Inflation In Singapore: What Can MAS Do 

What Will Happen In 2024?

While the SGD is currently trading at an all-time high against the MYR, this could change in 2024 based on a number of factors.

For example, if China’s economy improves and the US Federal Reserve cuts interest rates, then the MYR could make up some ground against the SGD. Additionally, slowing growth or exports in Singapore could potentially weaken the SGD. However, for now, Singapore residents can enjoy their increased purchasing power in Malaysia.

Read Also: From Bread To Kitchen Towels: What Is The Price Difference Between Buying In Singapore And Malaysia?

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