TA Research thinks that a positive outlook may emerge for the ringgit, as the election outcome last weekend was within expectations.
PETALING JAYA: With Perikatan Nasional (PN) making significant inroads in the recent state elections, Malaysia finds itself in a tough spot as policymaking turns more challenging while political risks add pressure on the ringgit and the stock market.
External headwinds in the form of deflation, deleveraging and defaults in China and dollarisation in Argentina have shaken investor sentiment and brought volatility back into markets, including a fresh bout of weakness for the ringgit.
In a note, BMI Country Risk and Industry Research cautioned that there could be “increased policymaking challenges” for Putrajaya after PN won nearly 60% state seats across Kelantan, Terengganu, Kedah, Selangor, Penang and Negri Sembilan.
BMI, which is a unit of Fitch Solutions, also looks to revise down Malaysia’s Short-Term Political Risk Index score of 72.9 out of 100.
Meanwhile, Hong Leong Investment Bank Research expects the FBM KLCI –Bursa Malaysia’s benchmark index – to waver in the near term, after previously rallying by 88 points in the past trading month, as investors weigh in the state polls outcome alongside with potential results season jitters.
As the ringgit forms the frontline to gauge investor sentiment and link to the world, SPI Asset Management managing partner Stephen Innes said there may be “a bit of post-election political risk” element that investors will reconsider when looking at local investments.
“Still, given a status quo outcome (in the recent state elections), I think the weaker ringgit is as much a function of China’s economic woes, given its high beta to the yuan, as it is about political risk,” he told StarBiz.
Innes also noted that Malaysia’s “omnipresent political storm clouds” tend to be harmful to foreign fund inflows.
“Hence, this would translate to reduced foreign investors’ appetite to buy the ringgit via Malaysian fixed assets,” he said.
The ringgit has been on a weakening trajectory since early this month, closing some 195 points lower at RM4.634 against the greenback yesterday after the Peoples Bank of China surprised markets with a policy rate cut, the second in three months, ahead of the release of July data on industrial output, retail sales and fixed-assets investment that grew less than expected.
China stalling economic recovery with weak consumer demand, rising unemployment and an ailing real estate sector, that account for 30% of the economy, all point to some real problems for policymakers.
Given the expectation of a weaker yuan, Innes thinks that Malaysian exporters will not sell their US dollars or repatriate their proceeds into the ringgit.
“Instead, they will hold on to the US dollar for a rainy day. Ultimately, this is a major issue for the ringgit since it’s a localised currency,” he said.
Socio Economic Research Centre (SERC) executive director Lee Heng Guie also agreed that the state election outcome has “some softening impact” on the ringgit.
However, he said the weakening of the ringgit against the US dollar is largely related to concerns about the health of China’s economy and the weaker yuan arising from the unexpected rate cut by China’s central bank.
“China’s slowdown will have an impact on Malaysia’s exports and tourism sectors as China is Malaysia’s largest trading partner and also one of the largest contributors of tourist arrivals in Malaysia.
“The future monetary stance of the US Federal Reserve (Fed) remains pivotal in influencing the movements of regional currencies, including the ringgit.
“While the Fed’s rate hiking cycle is coming to an end soon, it is likely to keep the short-term interest at a high level and longer until it is convinced that inflation and core inflation risks are contained and anchored,” said Lee.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid noted the ringgit and the Chinese yuan have a high correlation of 68.3% since 2015.
Hence, the surprise cut in China’s one-year medium-term lending facility rate to 2.5% from 2.65% would certainly have a bearing on the ringgit, he said.
“While the interest rate cut was small by global convention, the move goes to show that the central bank is already embarking on monetary easing since this is the second time it is reducing the policy rate,” according to him.
Commenting on the state elections, Mohd Afzanizam does not think the poll outcome will impact the ringgit.
“The voter turnout has been low compared to the last election. In that sense, it seems that the citizens would want political stability so that the economic policies can be implemented smoothly.
“More importantly is the outcome of the policies and how the Malaysian citizens would feel the impact.
“So, the ringgit will continue to be driven by external events, especially on the US interest rates, inflation and geopolitical risks,” he said.
Meanwhile, TA Research thinks that a positive outlook may emerge for the ringgit, as the election outcome last weekend was within expectations.
“The unity government’s ability to defend its three states, of which two are economically very important, has paved the way for continuity in status quo but it is imperative for the government to meticulously execute its strategies and announcements after subjecting them to vigilant scrutiny.
“However, it is pivotal to note that maintaining public confidence hinges on the precision and clarity with which the government administers the country and delineates policy directions.
“Any uncertainties or ambiguities in these domains could potentially lead to a decline in public confidence,” it said.
Looking ahead into the second half of 2023, TA Research foresees a “gradual and upward” trajectory for the ringgit against the US dollar.
“At present, our outlook remains favourable, with the ringgit likely to conclude at levels near RM4.30 to RM4.40 against the US dollar by the end of December,” it said.
The research house highlighted several key factors that underpinned its positive outlook of the ringgit.
These include the Fed’s monetary tightening that is expected to conclude soon, a stronger crude oil price and a continued revival of foreign tourists.
TA Research also said that optimism arising from the implementation of government policies and initiatives, including Budget 2024, the 12th Malaysia Plan review and the National Energy Transition Roadmap (NETR) would support the ringgit’s upward trajectory.
“These measures instill confidence among market participants, as Malaysia’s political climate has historically held a substantial influence over its currency’s performance,” it said in a note.
Echoing a similar stance, SERC’s Lee said Malaysia needs sustainable inflows of long-term capital to bolster the ringgit, backed by strengthened economic fundamentals, sustainable reforms, better macroeconomic conditions, catalytic investment and growth drivers to underpin the ringgit.
“The Madani government needs to focus on fixing and growing the economy; undertake the necessary reforms to drive more domestic and foreign investments; create more jobs and improve the income of the bottom 40% (B40) households as outlined in the Madani Economy framework.
“Time is of an essence. Get the ministries and agencies to quickly work on the plans and initiatives outlined to restore businesses’ and investors’ confidence in the Madani government’s credibility and capabilities to deliver the targeted deliverables,” he said.
Bank Muamalat’s Mohd Afzanizam believes that new policies such as the NETR and the upcoming New Industrial Master Plan 2030 are important to show that the government is serious about reforming the economy inline with the secular trends underway.
“Therefore, the execution and outcome are the next thing to watch for,” he said.
