In other words, short-term currency movements may have nothing to do with economic fundamentals. For example, the euro is among the strongest currencies in the last three months. Yet, the eurozone economy is stagnant, with weak global demand for its exports, and facing high energy costs.
The short-term movements of exchange rates are often just noise — speculative flows, temporary risk-on, risk-off events, or central bank interventions. They create headlines, but they rarely change how businesses invest or hire.
Long-term structural trend for the ringgit
What matters for exchange rates is the long-term trend, because it determines the structure of the economy. A persistently appreciating currency indicates rising relative productivity (the Balassa-Samuelson effect), strong institutions, fiscal sustainability and investor confidence. This in turn attracts long-term capital, encourages companies to expand domestic production and activities, and supports higher-skilled employment, while also enabling a more diversified economy. Ultimately, it delivers what really matters for the people of a nation — more jobs, better real wages, lower cost of living, and rising living standards. These are simple clear goals, easily measurable — and we wish policymakers and politicians would only focus on these.
See also: We said it ... but Singapore did it
The fact is that a persistent long-term depreciation of a nation’s currency is effectively a silent taxation on the people. Why? It raises import prices and pushes up inflation, erodes household purchasing power, and discourages investments. Firms become reluctant to commit to long-term projects when they expect the currency to weaken, and even equity investors will require much higher expected nominal returns to justify their short-term investments, making the equity market less investible. Workers will face slower wage growth as companies struggle with higher import input costs and lower profit margins, and the government and private sector pay more for external debts.
In other words, it is the long-term ringgit trend that influences the type of investments and industries we attract, the quality of jobs we generate, the sustainability of wage growth — yes, higher wages cannot be legislated but must be market driven, or domestic companies will lose competitiveness locally and abroad. This discourages future investments and job creation, leads to higher inflation that reduces real wages and weakens purchasing power for the people — and therefore, the cost of living or the quality of lives for Malaysians. It is the foundation for long-term prosperity.
See also: Why has the Malaysian ringgit been so strong recently and is it sustainable?
To try to peek into the future, we must first understand and acknowledge the past. What WAS the long-term trend for the ringgit? WAS, not predicting the future, but what the data says of the past, factually and honestly.
We think the historical trend of the ringgit to the USD is obvious for the past 45 years. Obviously, currencies are relative to another, and there will be many currencies in the world against which the ringgit has done far better. But using the USD is the standard practice for such deliberations. We hope we can agree that the intention is not to take the path of comparing to the bad and worse. Malaysians deserve better.
In all the periods in which the ringgit strengthened considerably (1971-1980, 2005-2011), it was because of the high prices of commodities that Malaysia exported. And when these commodity prices fell sharply, it had the opposite effect of weakening the ringgit (2008-2009, 2014-2015).
We could not find any correlation of the ringgit with any of our industrial product sectors, despite Malaysia’s industrialisation from the mid-1980s. Not the E&E, steel or cement, motor vehicles, rubber gloves, and so on. Either because they are low value-add, insignificant, not sustainable or are only for local consumption. We raise this because it has an important bearing on what the realistic strategies are going forward.
The Asian financial crisis caused the ringgit to plummet and the government of Malaysia to impose capital controls and a currency peg of 3.80 to the USD. This peg was removed seven years later in 2005. The ringgit appreciated to a high of 3.00 to the USD in 2011 due to the strong prices of commodities. But it subsequently followed the same long-term secular declining path! We have named this path LT1 in Chart 1.
The ringgit also went through a very sharp and rapid decline during the period 2014-2017. Surely, this was due to 1MDB. And because of 1MDB, we see a lower long-term trend for the ringgit, LT2. There are some who believe 1MDB is a victimless crime. We believe the loss to the ringgit is at least 50 sen to the USD. Now multiply this by the total wealth of all Malaysians that is denominated in ringgit. All the ringgit deposits in the banking system, the value of all Malaysian properties in the country, the foreign currencies obligations, and the annual import costs. Yes, the real damage is in the hundreds of billions of ringgit, although the actual reported financial loss is around RM55 billion. We know the figure of 50 sen cannot be proven accurately. This is not the point. It does not matter whether it is 20 sen or 90 sen. We wanted people to understand that the 1MDB scandal has a cost beyond just the actual financial losses. It creates systemic risks, negatively affected perception and confidence, and future investments.
For more stories about where money flows, click here for Capital Section
What are some of the reasons for the secular ringgit decline in the past?
The No 1 reason is productivity differences or the Balassa-Samuelson effect. Countries with higher productivity growth, especially in the tradable sectors, will see the long-run real exchange rates appreciating. Why? When productivity rises for firms that compete globally, they can pay higher wages without raising prices. Because of labour mobility, non-tradable industries (services, retail, construction) must then also pay higher wages to retain workers — causing non-tradable prices to rise (since they do not have matching productivity gains), thereby pushing up domestic prices (a country’s overall inflation is dominated by non-tradable goods and services). When domestic prices rise faster than foreign prices, the real exchange rate appreciates. And it can happen through both nominally higher currency exchange rate and through inflation differential.
Real exchange rate = nominal exchange rate x (domestic price level/foreign price level)
Chart 3 is the total factor productivity (TFP) at constant national prices for both Malaysia and the US. Except for a brief period in the first half of the 1970s, Malaysia’s growth in productivity has lagged the US’ in every year.
Charts 4 and 5 are the TFP using current purchasing power parity, based on current prices (not constant) in the same period, and setting it relative to the US. It says that for each of the years, Malaysia’s productivity is about 60% of the US. It improved from 2005 to 2011, where the productivity growth exceeded 65% of the US, and this is reflected in the ringgit. For as long as Malaysia’s TFP lags the US, it is to be expected that the ringgit will continue to be on this secular downtrend path.
Chart 6 shows that the inflation rates for Malaysia and the US have closely tracked each other since 1971. And therefore, in the absence of inflation rate differentials, the entire difference in TFP is expressed in the nominal exchange rates differentials.
We are aware that the Malaysian CPI could be underestimated, due to controlled price items and weightages assigned. We aim to visit this topic in the near term. And to the extent that it is underestimated, it means the Malaysian inflation rates are higher than that of the US — and that gets reflected in the depreciating ringgit over time.
We think the other drivers for long-term movements in exchange rates, like structural reforms, political stability and demographics were not significant factors. They have not changed much, for better or worse.
The medium-term trend for the ringgit — setting the path for the future
The short-term movement of the ringgit is the PRESENT, what affects the exchange rates arising from what is happening now and current expectations of the near future. The long-term movement of the ringgit as we articulated above is the PAST, why the ringgit took the long-term path it did over the past 45 years. The medium-term outlook is the FUTURE, and the most complex. It sits in the intersection of slow-moving fundamentals and fast-moving expectations. It is long enough for fundamentals to influence, but short enough for psychology, global risk cycles, economic shocks and shifting capital flows to overwhelm. It is the pathway to productivity and competitiveness — that ultimately determines the long-term trend of the currency.
The medium-term outlook drives investment decisions. Most companies plan their investments, expansions, and commitments over the three- to five-year horizon. It affects employment and wages. The effect of currency expectations also affects real wages, because it affects import prices and inflation and therefore the cost of living. And since companies, banks and the governments hold foreign exchange and have foreign debt obligations, it affects financial stability.
We summarise some of the drivers of the ringgit for the medium term in Table 2.
For policymakers, the idea is how to influence these drivers for the benefit of the people. In the case of Malaysia, how to reverse the last 45 years of secular and gradual decline, by focusing on factors that one has control over. These are terms of trade, economic growth, FDIs and portfolio flows, financial sustainability, clear and consistent domestic policies and improving our relative competitiveness.
Malaysia can achieve and sustain a positive secular trend for the ringgit into the future if every decision the government makes is based on a clear positive answer to a simple question: Will this decision improve the productivity and competitiveness of Malaysia?
We cannot go into details of all the above factors here. We will only highlight a few. For economic growth, we know our competitive advantage is commodities, especially palm oil — which clearly drives the ringgit. Are we doing what is necessary to improve its productivity, for example through artificial intelligence (AI) and technology? How can the government help?
We know productivity gains from industrial expansion and investments were not meaningful in the past and we think, unlikely, in the near future. What does this imply for Malaysia that continues to focus its growth strategies on industrial policies? Malaysia does not have the fundamental competitive advantages — domestic demand, scale, R&D, workforce, education and capital markets. We have an upcoming article that explains this very factor — and is a primary reason for the underperformance of Bursa Malaysia over the past decades. Why not think out of the box? We believe Malaysia needs to shift its development strategies to the service sector. Again, we have an upcoming article on this topic in the new year.
On fiscal sustainability and credibility, the verdict is still out. Yes, this government has implemented some reforms. But short of what was promised (reform credibility). “Kicking the can down the road” will continue for real reforms like operating costs (especially wage bills) and expansion of revenue from consumption. Politics was, is and always will be about popularism and short-termism. Consequently, development investments are fast disappearing since almost all fiscal revenue is taken up by operating expenses.
GEAR-uP, an outsourcing initiative by the government
And this is where we think this government’s strategy is heading. In the absence of budgetary resources to spend on development, the government appears intent to partly outsource this to the government-linked investment companies (GLICs) and government-linked companies (GLCs). To quote the government: “The GEAR-uP initiative is designed with three distinct focus areas, each developed across three phases. The first focus area involves realigning the mandates of GLICs to support the Ekonomi Madani framework. The second focus area centres on driving investments, performance and impact by catalysing efforts to ‘Raise the Ceiling’, partnering with the government to ‘Raise the Floor’, and transforming firms to become globally competitive. The final focus area is dedicated to future-proofing governance and institutionalising reforms. This involves clearly defining the government’s ownership philosophy, strengthening stewardship capabilities for effective oversight, and implementing legislative reforms.”
Well written. What it means is that the GLICs and GLCs will be investing RM120 billion domestically from 2024 to 2028. Up to June 2025, RM11 billion had already been deployed. It means the target is to invest RM24 billion a year, on average. For perspective, the country’s total gross capital formation last year was RM396 billion. And the federal government development expenditure was RM82 billion. In other words, this is a very significant and big-impact decision that may have very long-tail consequences. We think it deserves to be carefully deliberated.
There are three focuses for this initiative. Many are broad and difficult to quantify. As we stated above, what is needed is a clear positive answer to a simple question, will it improve Malaysia’s competitiveness and raise our relative productivity? Will each of the investments from the GEAR-uP initiative raise competitiveness and productivity? Will it result in “crowding in” and not “crowding out” the private sector? How realistic are “crowding-in” strategies not driven by market forces? Will these new investments generate a higher return on investment (ROI) than existing overseas investments or generate better returns than what the private sector can? We list some of these investments in Table 3.
Obviously, at this early stage, we cannot tell whether it will prove to be helpful for the Malaysian economy, the ringgit, employment, real wages and a better life for the people. Having a table to measure up how these investments perform over time will be a useful guide.
What we do know are the following:
1. In the near and medium term, a year or two, this average RM24 billion-a-year of portfolio inflow by the GLICs and GLCs will push up the ringgit because these GLICs and GLCs will have to sell some foreign assets and buy ringgit to invest domestically. Is this positive? Yes, a stronger ringgit reduces inflation to the extent that import prices will be lower. But it also makes our exports tougher, especially for the smaller firms.
And beyond a year or two, there will be no subsequent effect to the ringgit because it will be expected and the ringgit then would have factored this in.
It is likely that it may cause the ringgit to overshoot its fundamentals in the medium term, which is not positive for the real economy. An overpriced ringgit will cause exports to become uncompetitive, imports to surge, loss of industrial competitiveness, distort resource allocation (more money to real estate and retail), affecting long-run investments and productivity.
2. Based on a comprehensive analysis of the performances of GLCs versus the private sector, the former underperformed the latter in earnings before interest and taxes (EBIT) margins, return on equity (ROE) and stock prices for all sectors of listed companies on Bursa Malaysia. (Please refer to our article in The Edge, Aug 25, 2025: “Sustained economic success comes only from harnessing local private enterprises”. We reproduce three of the charts from the article in Chart 7.)
Already, GLCs account for 55% of the total assets of all Bursa-listed companies, but only 42% of the market capitalisation. And they are underperforming despite having preferential treatment, access to the government, licensing, contracts and procurement, easy access to credit, and implicit and explicit government support. In other words, if the investments by GLCs act to crowd out the private sector, the net effect to the Malaysian economy will be very negative. Do we need GLCs to create funds to invest as private equity (PE), doing property developments, investing into industrial businesses?
3. Finally, the GEAR-uP initiative is only positive if the ROI for these diverted investments from foreign to local can generate a higher ROI. Why? Like all investments, if future streams of earnings begin to fall, it will result in opportunity losses. If the new domestic investments make less returns than the existing foreign investments, the cash flows to these GLCs will decline into the future. This will reduce future portfolio inflows back to Malaysia, and the dividends to be received by its shareholders. In the case of the Employees Provident Fund (EPF), the millions of Malaysians who contribute will have their livelihood affected. For the others like Khazanah Nasional Bhd and Petroliam Nasional Bhd (PETRONAS), it lowers future dividends to the federal government and therefore impacts fiscal position and development expenditures. It is impossible to argue that lowering the future returns or profits of the GLCs and EPF is good for Malaysia and Malaysians.
Let us look at the facts and the data. Consider the case of EPF. From 2011 to 2025, in every single year, its foreign investments generated returns far higher than its domestic investments. Sometimes, it was more than double (see Chart 8). For example, global investments accounted for only 37% of total assets under management but generated more than 50% of total investment income in 2024. Therefore, one must assume that any funds diverted from its foreign investments into Malaysia will reduce the profits to EPF. This is negative for the dividends EPF pays out. Malaysians already don’t save enough for their retirement — how does this help them?
Conclusion
In summary, the current strength of the ringgit may be short term, driven by cyclical relief from external factors (as we articulated last week in this column). A significant positive for the ringgit going into 2026 is, we believe, the high likelihood that the US Fed will further ease its monetary policy and expand fiscal stimulus while corporate balance sheets will remain strong. Meaning, a weaker USD near term. A strong or sustained US capital market is needed to fund its AI competition — the US cannot afford to lose as it poses an existential threat to the nation, economically, militarily, politically and culturally.
The GEAR-uP initiative can drive up the ringgit in the short and medium term, but it is extremely difficult to see how it can be positive for the ringgit in the long term. Remember, we want to raise competitiveness, not reduce, to strengthen the ringgit. And the state participation in the country’s economic activities is already exceedingly overwhelming.
On reform, especially fiscal reform and subsidies, the verdict is still out.
On economic policies, the continued emphasis on industrial plans is unlikely to turn Malaysia more competitive and gain relative productivity advantages.
On trade, surely the new US tariffs will at least be partially negative for Malaysia. And we can expect China to divert more exports into the country. Newer investments, like data centres, have little impact on jobs and wages and minimal building up of a supply chain. Achieving real competitiveness in AI and digital transformation requires building a complex ecosystem from education to R&D, infrastructure, regulations and legislations, to finding the right niche, balancing risk and security with innovations and advancements, making hardware and developing software, adopting and competing with the best globally — instead of “jaguh kampungs” and whitewashing everything with the phrase “AI”. We will write an article on what a sovereign AI framework must be able to achieve soon.
What then will turn around the structural drag of the ringgit of the past 45 years?
Portfolio performance
The Malaysian Portfolio gained 0.8% for the week ended Dec 3, performing better than the broader market. The FBM KLCI was down 0.1% over the same period. Hong Leong Industries (+6.1%) and Malayan Banking (+2.8%) were the two gaining stocks while Insas Bhd – Warrants C (-50.0%), LPI Capital (-0.4%) and United Plantations (-0.2%) ended in the red. Total portfolio returns now stand at 197.7% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 11.3% over the same period, by a long, long way.
The AI Portfolio also ended higher, up 2.8%, lifting total returns since inception to 4.6%. The biggest gainers were Marvell Technology (+14.2%), Cadence Design Systems (+9.7%) and ServiceNow (+3.8%). Datadog (-1.6%) and Alibaba (-0.9%) were the only two losing stocks last week.
The Absolute Returns Portfolio, however, fell 0.7%, paring the total returns since inception to 40.3%. The two gainers were SPDR Gold MiniShares Trust (+1%) and Kanzhun (+0.6%), while ChinaAMC Hang Seng Biotech ETF (-4.2%), Ping An Insurance-A (-2.2%) and Ping An Insurance-H (-1.7%) were the biggest losers.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
