Malaysia’s domestic economic performance has demonstrated resilience, with gross domestic product (GDP) growth reaching 5.9% in the second quarter of 2024 (2Q24), exceeding market expectations.
PETALING JAYA: As the ringgit gains ground, grabbing headlines and capturing the spotlight, questions arise about the driving forces behind its rise and whether this momentum can be sustained.
Its recent surge is not a temporary blip – it signals deeper shifts in Malaysia’s economic landscape.
To note, since July 2024, the ringgit has surged to a 19-month high against the United States (US) dollar, outperforming most regional currencies.
Year-to-date, the ringgit has strengthened by 7.87% against the greenback.
With the local currency on the rise, Malaysia’s economic landscape is clearly undergoing a transformation.
Will this upward trend continue, and what is fueling the ringgit’s impressive performance?
Interest rates and investor sentiment boost
The ringgit’s rebound has been driven by clearer policy directions from advanced economies.
Central banks like the Bank of England and the European Central Bank are cutting rates, and the US Federal Reserve (Fed) has followed suit.
This narrows the interest rate differential between Malaysia and these economies, making Malaysian assets more attractive and boosting the ringgit.
To note, Bank Negara last raised the overnight policy rate (OPR) from 2.75% to 3% in May 2023 and has maintained this rate through eight consecutive monetary policy meetings, including the most recent one on Sept 5.
At the same time, Malaysia’s domestic economic performance has demonstrated resilience, with gross domestic product (GDP) growth reaching 5.9% in the second quarter of 2024 (2Q24), exceeding market expectations.
Resilient household spending, which rose by 6% year-on-year (y-o-y) in 2Q24 compared to 4.7% in 1Q24, and a 5.8% y-o-y increase in gross exports in 2Q24, up from a 2% y-o-y increase in 1Q24, have contributed to this growth.
Tourism also saw a notable recovery, with Malaysia welcoming six million tourists in 2Q24, up from 5.8 million in 1Q24.
This rise boosted travel receipts to RM22.4bil for the quarter, up from RM21.4bil in 1Q24 and RM12.6bil in 1Q23.
Strong investments in sectors like electrical and electronics (E&E) and data centres have spurred robust construction activity, which also supports the economy.
Construction activities during the quarter saw a 17.3% y-o-y growth compared to 11.9% in 1Q24, driven by civil engineering projects and specialised construction.
Supporting actions by policy makers
Policy support continues to play an essential role in sustaining the economic recovery.
Programmes such as Budi Madani ensure targeted subsidies and financial assistance reaches those who need it most, stimulating consumption and economic activity.
The government has also introduced Employees Provident Fund (EPF) Account 3 in May 2023, allowing members to access their savings for short-term financial needs, providing households with additional financial flexibility.
Another key action has been the encouragement for government-linked companies (GLCs) and government-linked investment companies (GLICs) to repatriate and convert their foreign investment income into ringgit, increasing its demand.
Additionally, there has been active engagement with businesses to promote the regular conversion of foreign currency income, further supporting the local currency’s value.
Currency fluctuations and economic health
While currencies can fluctuate significantly in the short run, they are not always a reliable indicator of an economy’s health.
Factors such as global events, including the Federal Reserve’s (Fed) actions, wars and geopolitical tensions, can impact currency performance and may have little to do with Malaysia’s economy.
For example, when the Fed raised its federal funds rate by 525 basis points to combat inflation in the United States (US), the ringgit weakened.
Higher interest rates in the US made investments more attractive, leading investors to move their funds away from Malaysia.
Some have suggested raising Malaysia’s OPR to support the ringgit, even when price pressures are contained in Malaysia. In this case, matching US rates solely to defend the ringgit could burden the economy and local borrowers.
As such, given that Malaysia’s price pressures are relatively contained, efforts were focused on strengthening the country’s economic fundamentals rather than on short-term currency strength.
This includes boosting productivity, attracting high-value investments, and creating well-paying jobs.
Strengthening these areas will naturally attract more investors and increase demand for the ringgit, as is currently evident.
Importance of structural reforms
To sustain momentum and ensure stability, structural reforms are vital for maintaining investor confidence and securing long-term economic benefits.
Key areas include commitment to fiscal sustainability such as subsidy rationalisation, upskilling and reskilling the workforce, attracting high-value investments and managing a fair and orderly climate transition.
Malaysia’s economic growth forecast for 2024 is between 4% and 5%, while inflation is expected to remain manageable between 2.0% and 3.5%.
Implementing reforms now, while the economy is strong, is more effective than waiting for a crisis, which could be costlier.
These reforms will make Malaysia more productive and competitive in the long run. The ringgit will naturally reflect this strength over time.
