Lower import costs offset export price pressures in Malaysia’s trade structure
KUCHING: A stronger ringgit could help lower production costs in Malaysia’s import-heavy economy, rather than undermine export competitiveness as conventional theory suggests.
Universiti Malaysia Sarawak (UNIMAS) senior lecturer Dr Dzul Hadzwan Husaini said currency appreciation is typically associated with weaker exports because domestically produced goods become more expensive in foreign currency terms.
“However, that textbook intuition does not fully apply to Malaysia’s economic structure today,” he told Sarawak Tribune.
He explained that Malaysia operates as a highly import-dependent production economy, with more than 60 per cent of production inputs sourced from abroad—particularly in manufacturing, electrical and electronics (E&E), food processing and agriculture.
“With this structure, a firmer ringgit lowers input costs, reduces cost pressures along supply chains and ultimately improves the price competitiveness of Malaysian final goods, rather than weakening it,” he said.
Conversely, Dzul noted that a weaker ringgit transmits inflationary pressures quickly through higher imported input costs.
“When the ringgit weakens, production costs rise rapidly, margins are squeezed and inflationary pressures intensify,” he said.
From this perspective, he said the ringgit’s recent strength reflects domestic fundamentals, particularly the interaction between imported input costs, manufacturing performance and inflation control.
He added that improvements in E&E prices and commodity earnings have reinforced export receipts without raising domestic cost pressures.
Dzul said the ringgit’s appreciation of more than 10 per cent against the US dollar in 2025, followed by its continued firmness this year, should be viewed as partly cyclical but increasingly supported by structural factors.
He acknowledged that global developments—such as shifts in expectations around US monetary policy, movements in the US dollar and changes in global risk appetite—have influenced capital flows into emerging markets, including Malaysia.
These factors help explain the timing and pace of the ringgit’s movement, he said.
“However, they do not fully explain why the ringgit has been able to hold its gains, rather than reversing quickly as seen in some past episodes.”
He attributed this resilience to stronger structural support, including political stability, economic transformation and improvements in institutional quality that translate into stronger government effectiveness.
“From a currency market perspective, political stability reduces uncertainty and lowers the risk premium demanded by investors,” he said.
Clearer and more consistent policy direction, he added, has encouraged longer-term capital commitments.
He pointed to the gradual and targeted implementation of subsidy rationalisation.
“Rather than triggering broad inflationary shocks or social disruption, these adjustments have been absorbed smoothly, preserving household purchasing power while strengthening fiscal credibility,” he said.
Dzul also cited modest adjustments to the Sales and Service Tax (SST), which he said had broadened the revenue base without imposing significant macroeconomic stress.
He said the structural nature of the ringgit’s strength can be tested through data.
“If the appreciation is structurally supported, we should continue to see sustained foreign inflows into ringgit-denominated assets, not just short-term speculative flows,” he said.
Foreign direct investment commitments and realised inflows, particularly in productive and export-oriented sectors, should also remain strong, alongside improving fiscal indicators, contained inflation and resilient external balances such as the current account and international reserves.
Dzul added that the ringgit’s recent performance does not fit neatly into a narrative driven solely by nominal yield differentials.
While the Malaysia-US interest rate gap is often cited as a key driver, he said it should be treated as secondary in the current context.
“If the differential does not narrow, ringgit strength does not necessarily reverse as long as domestic fundamentals remain strong,” he said.
He said that a persistently wide differential could increase short-term volatility during periods of global risk aversion, but stressed that volatility should not be mistaken for fundamental weakness.
If the ringgit remains firm, Dzul said the overall impact would be more supportive than restrictive, although effects would vary across sectors.
“The primary beneficiaries are import-dependent industries, which form a large part of Malaysia’s economic structure,” he said.
Manufacturing—especially E&E and downstream processing—stands to gain from lower costs of imported intermediate inputs, improving margins and price competitiveness. Firms with US dollar-denominated liabilities also benefit as debt servicing costs decline in ringgit terms.
At the household level, he said a stronger ringgit helps contain the cost of living, as imported food items and agricultural inputs such as animal feed, fertilisers and machinery become cheaper.
However, Dzul said that some export-oriented firms with low import content may face margin pressure if they compete primarily on price and are unable to pass through exchange rate movements.
He added that the most vulnerable areas are localised, particularly small businesses in border regions such as Johor, Sabah and Sarawak, where retail activity depends on cross-border price arbitrage.
“A stronger ringgit can temporarily reduce spending from neighbouring countries,” he said.
Tourism, however, is unlikely to be materially disrupted at this stage, as travel decisions are typically planned months in advance, while business travel is even less sensitive to currency fluctuations.
“The net effect is improved macroeconomic stability through lower imported inflation, stronger real incomes and higher production efficiency, even as some sectors adjust,” he said.
