The Malaysian ringgit (MYR) is currently trading at record lows against the US dollar, and last week hit a 26 year low of 4.7987. This has caused problems for the government in Kuala Lumpur because opposition leaders have accused the incumbent president, Anwar Ibrahim, of consistently politicising the weakness of the ringgit when he was in opposition.
The Second Finance Minister Amir Hamzah Azizan appeared before the Malaysian parliament at the end of February to explain the reasons behind the ringgit’s weakness. He pointed to the strength of the US dollar, which has made huge gains on foreign exchange markets in recent months because of the Federal Reserve’s aggressive policy of monetary tightening to bring down inflation, as a key reason for the ringgit’s declines.
Indeed, the Bank Negara, Malaysia’s central bank, has maintained a relatively loose monetary policy despite the Fed’s hawkish shift. Interest rates are relatively low at 3% – compared to 5.5% in the States – with the Bank Negara not moving to hike rates given inflation in Malaysia is also low at 1.5%.
The central bank has therefore prioritised economic growth and encouraging spending domestically in Malaysia over protecting the ringgit from weakness on foreign exchange markets. A weaker ringgit is perhaps not as much of an economic problem in Malaysia as in more import-dependent countries – Kuala Lumpur is currently running a massive trade surplus of almost $60 billion and a cheaper ringgit makes Malaysian exports even more competitive on global markets.
With that said, there are signs that the ringgit could move away from its historic lows against the dollar in 2024. For one, the Fed is potentially poised to start cutting interest rates this year, with Chairman Jay Powell saying earlier in the year that the central bank is “likely at or near its peak for this tightening cycle.” Lower yields in the States could encourage traders to move out of dollar markets and seek returns in emerging markets elsewhere – including in Malaysia. This could potentially cause a strengthening of the ringgit.
Strong economic growth levels in Malaysia could further boost sentiment on ringgit markets and boost its value. The central bank has predicted that the Southeast Asian country could experience economic growth of 4-5% in 2024 – a forecast that is backed up by the International Monetary Fund (IMF), which has said that “growth is projected to pick up slightly to 4.3% in 2024, supported by resilient private consumption and investment and a rebound in public spending.”
This comes as inflation, already lower than in most developed economies, is expected to fall further. Unemployment is also due to come down from its current level of 3.4%. These strong numbers could incentivise more foreign exchange traders to increase their exposure to the ringgit.
Malaysia is also expected to see its strong export numbers grown even further, with sales abroad potentially growing by 5% or further. In January this year, exports of manufacturing products, which account for about 85% of Malaysia’s total exports, increased by almost 10% year-on-year.
Last year, Malaysia also posted record foreign direct investment (FDI) inflows of 225 billion ringgit ($47.5 billion) and is entitled to expect similar levels again in 2024. With more businesses purchasing Malaysian goods, and more investors committing capital to Malaysian industry, this should lead to greater demand for the Malaysian ringgit and therefore drive up its value.
Amir Hamzah Azizan suggested before the Malaysian parliament that the ringgit could be undervalued by between 8-10%. There are certainly reasons to be optimistic that the Malaysian currency could strengthen this year, particularly given the Bank Negara has said it is prepared to intervene in markets to strengthen the ringgit. With the Malaysian ringgit being the best performing Asian currency at the start of March, the currency seems to have made a good start to a potential recovery against the dollar.
Author: Harry Clynch
#Malaysia #Asia #ForeignExchange #CapitalMarkets #MalaysianRinggit #MYR
