Malayan Banking Bhd head of forex research Saktiandi Supaat
PETALING JAYA: Although the ringgit is expected to come under pressure against the US dollar in the near term, structural economic reforms are vital and need to be implemented without delay to strengthen the local currency, going forward.
Foreign exchange (forex) strategists and economists, who expect the local currency to trade between RM4.25 and RM4.50 to the greenback by year-end, said economic reforms should be taken to minimise the ringgit weakness.
They said this would, among others, improve foreign inflows into the country and spur the currency’s strength and the economy. As at press time, the ringgit was trading at RM4.61 to the dollar.
Malayan Banking Bhd
head of forex research Saktiandi Supaat told StarBiz structural reforms could be focused on improving economic growth, which in turn would be supportive of the ringgit in the long run.
What is key is to ensure fiscal sustainability and reforms should be focused on improving the fiscal position in the medium term and enhance economic fundamentals.
A good macro policy mix would ensure the resilience of the economy during business cycles, he added.
The government is trying to pursue a number of initiatives that are aimed at enhancing digitalisation, growth potential, fiscal resilience and creating a future-ready workforce.
“Some of these initiatives look promising such as the Industry4WRD programme to drive digital transformation of manufacturing and the related services sectors.
“If such initiatives are successful, it can bode well for both the country’s economy and the ringgit’s position.”
In response to the Fourth Industrial Revolution, the Industry4WRD: National Policy on Industry 4.0 was launched on Oct 31, 2018 to drive digital transformation of the manufacturing and related services sectors in the country.
Saktiandi expects the ringgit to trade between 4.25 and 4.40 to the dollar by year-end.
Bank Muamalat Malaysia Bhd Chief Economists and Social Finance Mohd Afzanizam
Bank Muamalat (M) Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid agreed that economic reforms are needed to spur the ringgit’s strength.
While Bank Negara would intermittently intervene in the forex market to stabilise foreign currencies and not to dictate any specific level, he said to expect the central bank to do the “heavy lifting” for the ringgit to appreciate is far-fetched.
“The best way to address the ringgit weakness is to ensure economic reforms will proceed as planned. When the market starts to see the traction of the economic reforms, I think foreigners would change their call on the ringgit.
“The enactment of the Fiscal Responsibility Act (FRA) would be the immediate priority.
“I suppose the FRA will set the tone on how the government would be able to reduce its fiscal gap and debt burden, as well as improving the transparency and governance of fiscal policy.”
He said fiscal consolidation via tax policy and streamlining the subsidies programme will help improve the credibility of the government’s commitment to keep the budget deficits lowered.
“At the end of the day, it’s about how the government would implement the reform idea and how it can benefit the rakyat.
“So it’s about the communication strategy and credibility of the reform plan,” Afzanizam, who is projecting the ringgit to hover at RM4.30 against the greenback by year-end, said.
Prime Minister Datuk Seri Anwar Ibrahim, when tabling the revised Budget 2023, reaffirmed that the government would be presenting the FRA this year to ensure greater transparency and accountable management of the economy.
Economist Lee Heng Guie, who is the Socio-Economic Research Centre’s executive director, said Malaysia must continue to enhance economic and financial resilience through sound macroeconomic policies.
These include having a sustainable economic growth, price stability, healthy balance of payment, sustainable fiscal and debt management.
Besides that, a strong and well capitalised banking system as well as maintaining a deep and liquid capital market and the accumulation of strong foreign reserve war chest against the external shocks are needed.
Malaysia had experienced various episodes of sizeable capital reversals, which impacted foreign reserves and the ringgit, he noted.
Lee said the government had incurred the 26th consecutive year of budget deficit since 1998 on a narrow revenue base relative to high commitment of operating expenditure (largely unsustainable subsidies).
On the outlook of the ringgit, Saktiandi said he continues to hold a positive view of the local currency in the medium term.
He said the ringgit has recently been facing a period of weakness as short-term sentiment had been affected by less favourable external developments that include broad greenback’s strength, disappointment in China’s recovery and a decline in crude oil prices.
However, he believes this weakness is likely to be temporary as China could potentially do more in terms of stimulus to support its economy and strengthen the recovery.
A more discernible China recovery could more likely come towards the end of this year, he said.
That should also give a boost to crude oil prices, which have recently been weighed down by China demand concerns, he added.
“The dollar, meanwhile, while expected to stay supported, is likely to end the year lower and should provide a relief for the ringgit.
“We therefore continue to hold a positive view of the ringgit in the medium term.
“As a note, the BIS real effective exchange rates (REER) shows the local currency as among the most undervalued currencies regionally, which could imply substantial appreciation for the currency once sentiments take a turn,” Saktiandi added.
BIS-calculated REERs are adjusted by relative consumer prices. An increase in the index indicates an appreciation of the currency.
OCBC Bank foreign exchange strategist Christopher Wong
Meanwhile, OCBC Bank forex strategist Christopher Wong said the ringgit’s near-term outlook may be slightly lacklustre largely due to external drivers including the yuan depreciation, resurgence in dollar strength, much higher US Treasury (UST) yields and broad softness in oil prices.
However, he said domestic fundamentals remain largely sound apart from the modest shrinking of current account surplus and lesser impetus for Bank Negara to tighten monetary policy after headline consumer price index eased.
“But beyond the near term, we still look for the ringgit to recover some lost grounds on the back of expectations of softer dollar and UST yields as the Federal Reserve nears the end of its tightening cycle.”
Additionally, Wong said China’s rebound should return in the second half and will likely benefit the ringgit’s inbound tourism and trade.
“Besides that, the central bank is still in a policy normalisation cycle and could possibly tighten at a later time if inflationary pressures prove sustained.
“In consideration of the above factors, we continue to maintain a constructive outlook on the local currency,” he said.
The bank would also be looking out for the Prime Minister’s Madani economic narrative in August to see if there is any specific mention on rationalising subsidies and plans aimed at improving budget balances, Wong noted.
He said some of these may help to shore up foreign investor confidence and eventually increase demand for the ringgit in the medium term.
Wong forecasts the ringgit to hover at 4.50 to the dollar in the fourth quarter of the year.
