PETALING JAYA: The ringgit has fallen against most Asean currencies, and not just the US dollar, in the past five years as Bank Negara and successive governments struggled to solve long-term structural issues hammering the ringgit.
With the ringgit inching closer to the record-low of 4.8850 per US dollar, experts said it is unfair to blame only soft exports and major economies’ high interest rates for the ringgit’s poor conditions.
The last time the ringgit hit 4.8850 was when Asia suffered from severe currency speculation that drove former Prime Minister Tun Dr Mahathir Mohamad to introduce capital control measures.
In another unfavourable news for the ringgit, the local note touched a fresh low against the Singapore dollar yesterday at almost 3.556.
Meanwhile, the ringgit closed at 4.78 per US dollar yesterday, down by 4% year-to-date.
The recent weakness in the ringgit was partly due to the soft economic growth reported last week, whereby annual gross domestic product growth for 2023 missed the official forecast.
The ringgit was also battered by the fact that the Malaysian capital market recorded its second consecutive month of net foreign outflow, driven by a bigger sell-off in domestic bonds.
In January 2024, a net foreign fund outflow of RM4.4bil was seen, significantly higher than the outflow of RM1.9bil a month earlier.
January’s net fund outflow took place as Malaysia’s debt securities recorded a bigger net outflow of RM5.1bil, even as foreign inflows into local equities doubled to RM0.7bil from December’s amount
To put it into perspective, the ringgit’s weakness was not a new phenomenon.
In the past five years, the local currency has fallen by about 17% against the US dollar and the depreciation was not confined to the greenback alone.
In fact, in the past five years, it has fallen by 18% against the Singapore dollar, 11% against the Vietnamese dong, almost 9% against the Philippine peso and 3.7% against the Thai baht.
The ringgit also weakened against the Indonesian rupiah by 5.4%, Brunei dollar (15%) and Cambodian riel (almost 6%).
It is noteworthy that the Chinese yuan is another currency that has strengthened against the ringgit, rising by over 9% in the five-year period. Malaysia had a trade deficit of RM66bil with China in 2023.
The ringgit has been on a long-term depreciation, particularly in the past decade, following the 2014 oil price crash and the mega scandal of 1Malaysia Development Bhd (1MDB).
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the ringgit’s long-term weakness was also due to the country’s economic fundamentals.
Beyond the US dollar’s appreciation, he said the need for economic reforms in Malaysia has affected the strength of the ringgit.
He told StarBiz that foreign investors pay attention to economic reforms, as this will allow the economy to grow faster and more sustainably in the mid to long-term horizon.
Such reforms would involve the reorganisation of limited resources into productive sectors, he added.
“This will make the economy more vibrant, competitive and could result in better earnings potential among the private firms, be it listed or non-listed entities.
“Once the investors are convinced, they might come in a big way (which in turn would benefit the ringgit). However, the government needs to be mindful in respect to the implementation of economic reforms.
“The last thing that we want to do is to create negative shocks to the economy. It’s a delicate balancing act,” said Mohd Afzanizam.
Meanwhile, DBS Bank vice-president of regulatory portfolio analytics Gabriel Ryan said that the ringgit’s performance in the last several years was largely due to external pressure.
“There isn’t necessarily a major weakness in the ringgit per se.”
Ryan noted that some South-East Asian nations have “benefited more than others” as they stepped in to fill the supply-chain gap arising from the US-China trade war.
“In this scenario, there are limited short term ‘bazooka’ measures to overcome the ringgit’s slide.
“Over the longer term, the government and central bank are focused on fundamentals. Further, Bank Negara’s action to avoid direct foreign-exchange (forex) intervention, including pegging, is a sign of confidence,” he added.
Looking ahead, he cautioned that there are several risks to the ringgit’s movement, especially if the Federal Reserve (Fed) is forced to keep its policy rates “higher for longer”.
“This narrative is becoming the dominant theme now. Secondly, Malaysia’s trade and export is sluggish, likely in line with the slower global demand, and recovery of the Chinese economy.
“Thirdly, as of late, cracks are appearing in the US commercial real estate market, where both US banks and major foreign banks have large exposure.
“There may be a risk of contagion. Having said that, regionally systemically important banks are relatively well capitalised,” according to Ryan.
When asked about the ringgit’s near-term outlook against the US dollar, Ryan forecast the exchange to hover around the “current range”.
Bank Muamalat’s Mohd Afzanizam, on the other hand, kept his year-end target for the ringgit at 4.50 per US dollar but said a review is highly likely in the second quarter.
“Tendency (to review) is towards a weaker ringgit if the Fed did not cut its rates as expected,” according to him.
SPI Asset Management managing director Stephen Innes said that the forex market is tricky to forecast, given the muddled macro messages from the US economy.
However, he does not foresee the US dollar-ringgit exchange rate moving to five for no other reason than the Fed cutting interest rates this year, which will limit the US dollar rally.
“The only chance of the exchange rate hitting five is if the Fed hikes, which is simply not on the cards, even if inflation is slow-moving to the Fed’s target of 2%,” he said.
“On the other hand, the exchange rate of four is equally unlikely, as the market is now only pricing in three rate cuts versus seven at the beginning of the cycle.
“And given the economic woes in China, a close trading partner with Malaysia, we think the ringgit will struggle to gain much beyond 4.35 this year,” said Innes.
In a note yesterday, AmBank Group Economic Research said it had revised its ringgit forecast for the first three quarters of 2024 to be weaker. However, it maintained the year-end target of 4.50 per US dollar.
“We are pricing in weaker ringgit over the short term but maintain our view for the longer time horizon.
“Timely indicators showed that the markets as a whole have already toned down their aggressive Fed rate cut narrative and, perhaps, become more wary in betting weaknesses in the US economy to materialise quickly,” it said.
AmBank Group Economic Research said it remains optimistic that there should be support for the ringgit past short-term volatility.
It further opined that the volatility and US dollar strength will not last past the short term, and that the US dollar index should come down in the medium term.
“This is due to the Fed rate cut speculation dominating market trading and forex forward points hovering in the negative territory.
“In terms of the fundamental strength, the ringgit is poised to gain further due to Malaysia’s economic condition,” the research unit said.
