Asked by Anonymous
Asked on 18 May 2018
I am assuming your first question relates to Malaysia pegging their RM to SGD - 1:1?
Let me try to answer your question in reverse (my personal opinion). I think it is highly unlikely that Malaysia will be able to peg their exchange rate 1:1.
Malaysia uses a floating exchange rate system.
Malaysia's exchange rate started falling in 2014 in view of the fall in oil prices, lack of political stability in Malaysia due to the expose of 1MDB. The devaluation of China yuan in 2015 as well as increase in US interest rate may also have contributed to the depreciation of the RM.
It is unlikely and difficult for Malaysia to plough in large amounts of money from their foreign exchange reserves to peg their currency to Singapore because it requires an infinite $ in an economy where foreign investment is seen as lacklustre (currency continues to depreciate in view of exiting investments due to political instability) and no one is willing to hold the RM due to the instability.
One must also note that the fundamental differences in exchange rate between Singapore and Malaysia arose from the fact that the political system, the economic prosperity of both economies are vastly different.
Floating exchange rate and not pegging it to S$ also allows for some of the balance of trade imbalances to resolve by itself. When RM depreciates, it increases the attractiveness of Malaysia's exports. This will lead to an increase in exports demanded internationally. The reverse is true, in the presence of a declining RM, Malaysians will prefer domestic products over foreign products. This will also help to appreciate the RM (slighty?) against a basket of internation currencies.
For those few reasons above Malaysia is unlikely to peg the RM against SGD.
Should Malaysia be incentivise to peg their currency to SGD, (in my view) it will boost the SG economy because we will then be more competiive compared to our neighbours. The political stability will encourage more FDIs into SG instead of Malaysia since the cost of doing business is the same (if Msia decides to peg its currency), the same applies to our exports.