The value of the Ringgit is a key indicator of how trade and investment is faring in Malaysia, or rather it is an indicator of how healthy Malaysia’s trade with the international business community is doing. A falling Ringgit value therefore means that trade is slowing down and that many people are selling the Ringgit away and pulling their investment out of the country.

Most people are not economist and therefore do not know complicated economic terms and functions. Therefore, in this article, we try to explain in the simplest way possible, why the Ringgit value depreciated at an alarming rate. Last year saw the Ringgit fall below RM4 per 1 USD and experts predict that the value may slide further in 2016.

The Ringgit depreciation began in late 2014 with the worst two day slide observed in the history of the Malaysian economy, with the exception of the Asian economic crisis in 1997-1998. It was later branded the worst performing Asian currency for that year.

Provided that right now, Malaysia is not alone in its currency value fall, it is no doubt important to see what local and international factors contributed to this phenomenon:

Fall of Oil Prices

This is one of the leading commodities that Malaysia depends on as it exports crude oil. The global oversupply of petrol has caused Brent crude oil prices to fall to around 30SUD per barrel. Falling oil prices has caused many Oil and Gas companies in Malaysia to lose their investors. Companies like Shell have carried out extensive employee retrenchment in an effort to stay afloat and continue operations. However, they are not out of the danger zone yet as the oil glut does not seem to be letting up.

A decrease in oil prices means that the country is earning less from its crude oil exports, which brings us to our next point.

Malaysia’s Fiscal Deficit

For every year since the 1990s, Malaysia has been running on a deficit budget, meaning that we have more state debts compared to income. For many years Malaysia has to borrow money from Capital markets to cover its spending.

Borrowing from capital markets mean that the government has to borrow money from the private business community in order to survive. Although this is very common and other countries do it too, this debt is a cause for worry because in past years, the money from crude oil sale was supposed to cover this debt. Now that oil prices have fallen badly, there is not enough money to pay this debt back. Hence the fiscal debt may increase. This is the reason why the government has been implementing a slew of cost cutting measures like suspending overseas JPA scholarships and doing away with the National service program.

Fearful of Capital Controls

Way back in 1997 when the Asian economic crisis happened, Malaysia implemented a range of capital control policies. Capital control basically means that the government limits and regulates the amount of money coming in and out of the country by controlling private businesses. It also means that the government can levy extra taxes on businesses.

Many investors do not like their businesses to be controlled by strict government regulation and are worried that Malaysia may do the same thing it did last time when the currency fell. They therefore take out their money and leave for other countries where there are more stable and freer trade policies.

1MDB Scandal

To be fair, the entire picture of this scandal is yet to be revealed. However, whatever that is known now is enough to make foreign investors nervous. The first is that investors never like to put their money in a country that shows signs of political instability as it may disrupt their dealings. Secondly, the amount of debt 1MDB has accumulated can affect how stable local banks may be, since several local banks are doing business with 1MDB.

No doubt that when the Wall Street Journal broke the news about money going into the Prime Minister’s personal accounts, there was a significant loss of confidence in the Malaysian currency.

Whether these allegations are true or not remains to be seen, but what is important is that many investors are fed up and would rather put their investments elsewhere.

Devaluation of the Yuan

In August 2015, China suffered a sharp stock market crash and the subsequent falling of the Yuan. This in turn pushed the Ringgit down further as the crash actually pushed the USD value higher up.