THE drop in the ringgit against the US dollar is considered temporary, with prospects for recovery towards the second half of the year.
The ringgit, currently at RM4.61 to the dollar, has been undervalued even prior to the Covid-19 pandemic; its real effective exchange rate or “fair value” is estimated by CIMB Group
at between RM3.90 and RM4.10 against the dollar.
It may move towards this “fair value” once the Chinese economy shows marked improvement especially in import demand, and there are strong signals that US policy rates have reached their peak.
The US federal funds rate (FFR) is expected to peak by the second half of the year, provided the US economy cools off more significantly than it has thus far.
For some time, there were jitters over the raising of the US debt ceiling; following the signing of the bill that suspended this ceiling until 2025, the focus reverts to previous concerns on US rate hikes.
With the latest round of non-farm payroll figures suggesting that the US job markets is strong, there is speculation of another rate hike this or next month.
Hence, the US dollar index has snapped back up, however, current dollar strength is unlikely to extend to the highs seen in late 2022, said United Overseas Bank (UOB) in a report.
UOB expects Asian foreign exchange to fall further (the ringgit to RM4.68 against the dollar) in the third quarter (3Q23), followed by a delayed rebound in the 4Q23 as China’s economy regains momentum.
The ringgit may keep weakening, possibly to RM4.80 against the dollar as the trade balance in April had plunged from RM23.4bil in 2022 to RM12.85bil this year, said former Inter-Pacific Securities head of research Pong Teng Siew.
As the US Federal Reserve (Fed) had continuously raised rates in 2202, there were occasions when the Malaysian benchmark rate was kept unchanged, in view of the need to keep the domestic economy stronger.
For steadier appreciation of the ringgit, there should be more sustainable inflows from foreign direct investments and non-speculative financial flows.
A long-term development agenda should also be implemented to accelerate Malaysia’s transition into a high income and sustainable economy.
Diversifying growth drivers
We should further diversify the country’s economic growth drivers beyond its current dependency on commodities, mid-value manufacturing and domestic consumption, said CIMB Group economics and market analysis regional head Intan Nadia Jalil.
The trade balance in the agrifood sector showed that imports continue to exceed exports, resulting in the widening of the trade deficit to RM29bil in 2022, from RM2.9bil in 2000.
Rising overseas remittances by foreign workers had led to a wider deficit in the compensation of employees to RM7.2bil from RM500mil in 2005.
More attention should be placed on the agrifood sector while government incentives to promote private investment should be effectively executed, said Bank Muamalat chief economist and social finance Dr Afzanizam Mohamed Rashid.
In the long run, the effective implementation of economic reforms will be the key driver for the ringgit, as that will improve investor and business confidence, leading to improved spending power among consumers.
The year-end forecast for the ringgit by Maybank is RM4.25 against the dollar.
With the possibility of a pause in US rate hikes this month, although amid a hawkish tone, the Fed could eventually soften its stance closer towards year-end as inflation gradually falls, said Maybank head of foreign exchange research Saktiandi Supaat.
China recovery
China is also likely to show a more discernible level of recovery at year-end, which should give a boost to commodity prices.
Bank Islam Malaysia expects the macro environment to be more “favourable” for the ringgit in the second half. The local equity market foreign funds flow had continued in the red each month this year, amounting to RM2.1bil in outflows.
Is there anything that can be done to stop the fall in the ringgit?
If the labour market gets tighter in the coming months, there could be a smaller window for a rate hike in Malaysia’s benchmark rate by another 25 basis points (bps) in the third quarter, to end the year at 3.25%.
This will, in theory, help to buoy the ringgit, along with the rate cuts by the Fed later this year, said Bank Islam Malaysia chief economist Firdaos Rosli.
Local bond yields would then fare better and attract more foreign inflows into the bond market.
Since the rise in the FFR in March 2022, the yield spread between 10-year Malaysian Government Securities (MGS)/US Treasuries (UST) has narrowed significantly, making USTs more attractive.
The US debt ceiling talks had sent additional jitters, leading to higher yields for 10-year UST compared with MGS; the yield spread between MGS and UST had entered negative territory by minus three bps on May 25.
The central bank can also intervene in the foreign exchange movement; however, this could affect the foreign reserve position.
As of May 15, Malaysia’s reserve position stands at US$114.7bil (RM529bil), adequate to cover 4.9 months of imports.
Yuan affecting ringgit
The ringgit had actually strengthened against other currencies such as the euro and yen, but the current round of yuan depreciation is having an impact more on China-reopening proxies such as the ringgit.The yuan is at risk of further downward pressure due to the negative carry that China government bonds offer over higher yielding assets such as USTs, which thus diminishes the appeal of yuan-denominated assets, said OCBC Bank foreign exchange strategist Christopher Wong.
Amid the myriad of factors to watch for, the long-term value of the ringgit should be a concern and something we should be working on.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the wriiter’s own.
