Steve Johnson
Financial Times
1st October 2015

Amid vigorous debate as to whether slumping currencies still have the ability to stimulate significant emerging market export growth, the recent example of Malaysia is fascinating.

During the Asian financial crisis of 1997-98, the collapse of the ringgit led to a sharp and almost instantaneous rise in exports.

Export growth accelerated from zero in mid-1997 to more than 40 per cent by early 1998, according to analysis by Hak Bin Chua, Asean economist at Bank of America Merrill Lynch.

As a result, Malaysia’s current account balance swung from a deficit of 12.4 per cent of gross domestic product in the second quarter of 1997 to a surplus of 18.7 per cent of GDP by the end of 1998.

“The J-curve effect, the temporary worsening [of the trade balance] following the depreciation, was short or even negligible in 1997,” says Mr Chua.

Since September 2014 the ringgit has plunged once again, tumbling to its lowest level against the dollar since the 1997 episode.

Yet, as Mr Chua observes, “the depreciation has not strengthened exports or improved the trade balance at all. There is no ‘J’ so far, only a flat ‘U’.”

This shines through clearly in the second chart, where export growth bumps along the bottom, even as the ringgit heads south.

Admittedly, the slide in the ringgit since 2014 has not been as severe as during the Asian financial crisis, so any resultant pick-up in exports should probably be smaller, but arguably it should not be non-existent.

So, why the disconnect? Mr Chua presents three possible reasons. Firstly, Malaysia has suffered a “severe” terms of trade shock, with the price of some of its key exports, such as palm oil and liquefied natural gas, having fallen markedly.

The picture is far from clear-cut, however. The IMF forecasts that the volume (rather than value) of Malaysian goods exports will rise 6.5 per cent this year, a little above growth of 5.8 per cent last year and the highest figure since 2010. For goods and services combined, export volume growth is forecast to be an impressive 15.1 per cent, the highest level since 2004.

This suggests that the weaker ringgit may indeed be boosting exports, but that this effect is being cancelled out by a worsening of Malaysia’s terms of trade.

However, the IMF also forecasts that Malaysia’s imports of goods and services will also rise 15.1 per cent in volume terms this year, despite the slide in the ringgit and weaker economic growth.

This suggests Malaysia may simply be becoming a more open economy that is embedded more deeply in global and regional supply chains. If so, the forecast rise in export volumes might have occurred anyway, even if the ringgit had not fallen.

Secondly, Mr Chua notes that, given the broad-based strength of the dollar, the ringgit’s slide against the greenback overstates its weakness.

The ringgit may have fallen 26 per cent against the dollar between October 2014 and August 2015, but it only declined 13 per cent in nominal effective exchange rate terms, Mr Chua calculates, limiting any expected rise in exports.

Thirdly, given that 12 per cent of Malaysia’s exports are destined for China, he argues that the latter’s economic slowdown, combined with its trend towards onshoring, represents another headwind.

The latter point could prove particularly problematic for a host of manufacturers across Southeast Asia.

“A recent IMF study shows that China is onshoring and capturing a greater part of the Asian tech supply chain,” Mr Chua says.

Gareth Leather, Asia economist at Capital Economics, agrees that Malaysia, as well as peers such as Thailand, “are suffering because the Chinese are moving down the supply chain”, stealing its neighbours’ lunch.

But although commodity exports may still be in the doldrums, Mr Leather nevertheless sees “possible signs” that manufacturing exporters “are starting to benefit from improved competitiveness” in countries where currencies have weakened.

In Malaysia itself, he says export data are “showing signs of improvement”, with rises in both volume and ringgit terms in July, having fallen in the April-June quarter.

Mr Chua’s conclusion is that the weakness of the ringgit “is only helping to cushion the negative shock [of headwinds to Malaysian exports], rather than reviving exports and growth”.

The debate as to whether currency weakness still retains its old power to boost export volumes seems destined to rumble on a little longer, at least.