IntroductionHello and welcome to Iggy the Investing Iguana’s YouTube channel, your go-to place for insightful financial analysis. In today’s video, titled “10 Reasons Why Malaysian Ringgit is at a 25-Year Low”, we will be exploring the various factors that have led to the Malaysian Ringgit hitting a 25-year low. We will be focusing particularly on the perspective of our Singaporean audience. Our aim is to provide you with a thorough understanding of the economic dynamics that are influencing this trend. So, sit back, relax, and let’s dive into the world of finance! Reason 1: Economic InstabilityImagine you’re playing a game of chess, but the rules keep changing. That’s what’s happening in Malaysia’s economy right now. It’s been going through a lot of ups and downs, which has caused the value of their money, the Ringgit, to drop. Why is this happening? Well, it’s mainly because of political uncertainty and frequent changes in policies. It’s like trying to hit a moving target; it creates an environment where no one knows what’s going to happen next. This unpredictability makes investors, who are like the players in this economic game, less confident. Think of it like this: if you’re playing a game and you’re not sure about the rules, you’d probably be less likely to take risks, right? That’s exactly what’s happening with the investors. Their lack of confidence is causing the value of the Ringgit to fluctuate, just like the scores in a game would if the rules kept changing. Reason 2: Global Market ConditionsThink of the global market as a giant interconnected web, where what happens in one part can affect the whole. Now, this web has been going through some rough times. Trade tensions and geopolitical risks (think of them as big disagreements between countries about politics and territory) have been causing a lot of uncertainty. This uncertainty has led to what’s called a ‘risk-off’ sentiment among investors. It’s like when you’re playing a video game and you decide to play it safe because you’re not sure what’s coming next. In the world of investing, playing it safe often means pulling out of ‘emerging markets’ - these are markets in countries that are still developing, like Malaysia. So, when investors start pulling their money out of these markets, it leads to a decrease in the value of the country’s currency. That’s why the Ringgit is weakening. It’s like a seesaw - when investor confidence goes down, so does the value of the currency. Reason 3: Weak Commodity PricesImagine you’re running a lemonade stand. If the price of lemons suddenly drops, you’d earn less money from selling your lemonade, right? That’s similar to what’s happening in Malaysia. Malaysia is like a giant lemonade stand for commodities (things that are traded in large quantities) like palm oil and natural gas. When the prices for these commodities go down globally, Malaysia earns less from exporting them. This decrease in earnings has a domino effect, causing the value of Malaysia’s currency, the Ringgit, to depreciate. It’s like having fewer coins in your piggy bank because you’re earning less from your lemonade stand. So, the weak commodity prices are another reason why the Ringgit is at a low point. Reason 4: High National DebtLet’s think of a country’s economy like a big household. Now, imagine if this household borrowed a lot of money. Over time, it would have to pay back not just the money it borrowed, but also the extra cost called interest. This is similar to what’s happening in Malaysia. Malaysia has a high level of national debt, which is like a big credit card bill for the country. The government has borrowed money to pay for things like building infrastructure or providing services. But this borrowing has raised concerns about the country’s fiscal health, which is like worrying about how the household will pay back its big credit card bill. This worry affects investor confidence - it’s like people being less willing to invest in a business run by the household because they’re worried about the household’s debts. This lack of confidence leads to a decrease in the value of Malaysia’s currency, the Ringgit. So, high national debt is another reason why the Ringgit is going through a tough time. Reason 5: InflationLet’s talk about inflation. Imagine you’ve saved up some money to buy your favorite video game. But when you finally have enough, you find out the price has gone up. That’s inflation - when the cost of things increases over time. In Malaysia, the inflation rates have been pretty high compared to other countries in the region. This high inflation is like a sneaky thief that slowly erodes the value of money. So, the money you have today might not buy as much tomorrow. This decrease in the value of money leads to the depreciation of Malaysia’s currency, the Ringgit. It’s like your saved-up money not being enough to buy that video game anymore. This makes the Ringgit less attractive to investors, both within Malaysia and from other countries. So, inflation is another reason why the Ringgit is having a hard time. Reason 6: Interest Rate DifferentialLet’s think of interest rates like the amount of extra pocket money you get for doing chores. Now, imagine you have two neighbors, and one gives you more pocket money for the same amount of work. Naturally, you’d want to work for the neighbor who gives you more, right? That’s similar to what’s happening with Malaysia and other countries. The ‘pocket money’ here is the interest rate, which is lower in Malaysia compared to other countries. This makes Malaysia less attractive to foreign investors, who are like the kids choosing which neighbor to work for. When these investors decide to take their money elsewhere (we call this capital outflows), it leads to a decrease in the value of Malaysia’s currency, the Ringgit. So, this interest rate differential is another reason why the Ringgit is facing a tough time. Reason 7: COVID-19 ImpactImagine a big storm hitting your neighborhood and disrupting everything - that’s what the COVID-19 pandemic has been like for Malaysia’s economy. It’s had a huge impact, causing the country’s GDP (that’s like the total pocket money of the country) to shrink and weakening the Ringgit. The pandemic has disrupted global supply chains - think of it like a giant machine where each part is made in a different country. When one part of the machine stops working (like when a country goes into lockdown), it affects the whole machine. This disruption, along with a slowdown in economic activities (like businesses having to close or people losing their jobs), has made Malaysia’s economic challenges even tougher. So, the impact of COVID-19 is another reason why the Ringgit is having a hard time. Reason 8: Foreign Direct Investment (FDI)Let’s think of Foreign Direct Investment (FDI) as a big international school. Students from all over the world (the investors) come to study (invest) in this school (the country). Now, imagine if fewer students start enrolling in this school. That’s what’s happening with Malaysia. There’s been a slowdown in FDI into Malaysia due to various factors. Think of these as reasons why students might not want to join the school - things like policy uncertainty (like not knowing what subjects will be taught next year) and global economic conditions (like their home country’s economy not doing well). This slowdown puts pressure on the Ringgit, because FDI is a major source of capital inflow for emerging economies like Malaysia. It’s like the school depending on the tuition fees from the international students to keep running. So, a slowdown in FDI is another reason why the Ringgit is facing challenges. Reason 9: Strength of US DollarImagine you’re on a seesaw. When one side goes up, the other side goes down, right? That’s a bit like what happens with the US dollar and other currencies, including the Ringgit. The strength of the US dollar is another factor that’s been pushing down the value of the Ringgit. It’s like a heavyweight champion in the world of currencies. When the US dollar flexes its muscles and gets stronger, it often leads to weaker emerging market currencies, like the Ringgit. So, think of it as a seesaw effect. When the US dollar rises (or strengthens), the Ringgit tends to fall (or weaken). This is another reason why the Ringgit has been having a tough time. Reason 10: Monetary PolicyLet’s think of monetary policy like the rules of a board game, set by the game master. In Malaysia’s case, the game master is Bank Negara Malaysia (BNM), which is the country’s central bank. BNM sets the rules, or in this case, the monetary policy, which plays a big role in determining the value of the Ringgit. One of these rules is setting interest rates. If BNM decides to set low interest rates to boost economic growth (like making the game easier to stimulate more play), it could lead to inflation and depreciation of the Ringgit. Think of inflation as the cost of items in the game going up, and depreciation as the value of the game currency going down. So, the monetary policy is another important factor that affects the value of the Ringgit. ConclusionThese are some of the key reasons why the Malaysian Ringgit is at a 25-year low. As we navigate these complex financial times, it’s crucial for investors, especially those based in Singapore, to keep these factors in mind when making investment decisions involving Malaysian assets.
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