A further interest rate hike by the US Federal Reserve will spell trouble for the ringgit, says an analyst.
KUALA LUMPUR: Malaysia’s efforts in wooing investors to bring home their returns have succeeded in propping up the ringgit, analysts say, but the path to recovery is littered with questions of if and when the US Federal Reserve cuts rates.
In the meantime, the government should continue to pursue structural economic reforms and use persuasion instead of intrusive capital controls to build investor confidence and cushion the ringgit, the analysts said.
The Finance Ministry said in a post on X on Sunday (May 26) that the ringgit recorded the best performance against the US dollar among 10 regional currencies as of mid-May.
From Feb 26 to May 17, the ringgit strengthened 2 per cent against the greenback, while the Singapore dollar, Chinese yuan, Indian rupee and Thai baht depreciated by 0.2 per cent, 0.4 per cent, 0.7 per cent and 1 per cent, respectively.
The South Korean won, Taiwanese dollar, Indonesian rupiah, Philippine peso and Japanese yen fell between 1.9 per cent and 3.4 per cent over the same period.
The ministry said the strengthening ringgit comes after action it took with the central bank three months ago to encourage government-linked companies (GLC) and government-linked investment companies (GLIC) to bring home income from foreign investments.
The efforts also include increasing interactions with exporters to convert proceeds into ringgit, monitoring conversions of export and import proceeds, as well as strengthening the domestic economy and continuing promised fiscal reforms.
The ministry pointed to how subsiding inflation in the US has increased market investors’ confidence in the prospect of the US Fed lowering interest rates this year, calling this the “catalyst” for the ringgit’s value recovery.
“Nevertheless, Malaysia has also mobilised several efforts to attract investors to local assets. This has strengthened the ringgit’s value compared to other currencies in the region,” it added.
WILL THE US FED CUT RATES?
Mr Lee Heng Guie, an economist and executive director of the Socio-Economic Research Centre, said the Malaysian government was painting a “narrative” that the measures it took had proven effective in strengthening the ringgit.
“It will help with public sentiment if you see your local currency is more stable and on the path to strengthening,” he told CNA.
The central bank has maintained that the underperforming ringgit, which in February fell to its lowest level since the Asian Financial Crisis in the late 1990s, is not reflective of the country’s economic fundamentals and growth prospects.
“From a growth perspective, Malaysia continues to register expansion and rising economic activity, accompanied by low and stable inflation,” Bank Negara Malaysia deputy governor Adnan Zaylani said in a speech on May 9.
From the start of 2022 until early May, the ringgit had actually traded stronger than the Japanese yen, Taiwanese dollar and the Korean won, while only marginally weakening against the Chinese renminbi, the Indonesian rupiah and Indian rupee, he said.
“This also affirms the view that we are facing more of a US dollar strengthening cycle, a US dollar story and not a ringgit weakness story,” he added.
When asked if the trend of a strengthening ringgit is set to continue, Mr Lee on Monday said the “key” factor is the US Fed rates.
Recent indications that the Fed could maintain high interest rates for longer or even further increase them if there was a need had caused the ringgit to “weaken a bit” last week, he said.
On May 24, the ringgit closed lower against the US dollar as the greenback strengthened due to robust US manufacturing economic activity, dampening expectations of a potential interest rate cut.
The US Fed had concluded that a strong US economy and an uptick in inflation meant progress against rising prices had stalled, as it voted to hold rates at a 23-year high.
Various US policymakers also “mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate”, the Fed added.
If the US Fed does cut its rates, the ringgit will “leap to another level”, Mr Lee said, although he warned that the situation remains “quite uncertain and volatile”.
“But if they’re going to move it up again, that spells trouble for the ringgit.”
Dr Shankaran Nambiar, a senior research fellow at the Malaysian Institute of Economic Research, told CNA that Malaysia cannot “depend too much” on what the US Fed does.
“The US still has concerns regarding inflation, so it’s not clear when they will stop raising rates, and you can be less sure when they will cut rates,” he said.
“Of course, if the latter happens, then it’s a clear path to the ringgit strengthening.”
Bank Muamalat Malaysia chief economist Afzanizam Rashid gave a more optimistic outlook, saying it will “only be a matter of time” before the US Fed cuts rates.
This will reduce the interest rate gap between US and Malaysia and improve the ringgit’s appeal, he said.
“The US rates have been too high for too long. The businesses and consumers in the US are feeling the pinch of higher interest rates,” he said.
“Knowing that the US consumer spending accounted for 70 per cent of its economy, a sudden stop in spending will cost their economy dearly.”
MAINTAINING PERSUASION
Mr Afzanizam said that the ringgit’s appreciation could be seen as signs of “confidence building” following an inflow of funds from international portfolio investors into Malaysia.
“The government is also committed to fiscal consolidation where there have been measures to raise tax and reduce subsidies,” he said.
“This will help the government to reorganise its resources so that they will (focus) on areas that will improve the country’s productivity in the long run. This may include more spending on education, healthcare and infrastructure.”
On May 22, Prime Minister Anwar Ibrahim announced that the government will cut diesel subsidies, which is expected to save around RM4 billion (US$847.8 million) a year. Petrol subsidies are expected to be trimmed next.
Once the government has consolidated its fiscal position, Mr Lee said credit rating agencies will hopefully review Malaysia’s investment outlook and make it a more attractive place for investors.
Mr Afzanizam said the federal government is also working with state governments to create more economic activities, with one example being the Johor-Singapore Special Economic Zone.
“This would result in more infrastructure projects to be built and the creation of multiplier effects to the economy. Essentially, this will attract foreign funds to Malaysia,” he said.
Meanwhile, efforts to persuade GLCs and GLICs to bring home investment returns should continue, although this should not be made mandatory to ensure their investment activities are not restricted, the analysts said.
The central bank estimates the potential annual income conversions alone to be between US$6 billion to US$7 billion, which would have been more than enough to offset Malaysia’s negative net outflows in 2023.
Mr Adnan said the central bank is looking at how it can further encourage corporates and businesses to bring back foreign currency balances, including a pilot initiative to allow these companies to reinvest abroad quicker when the time comes.
This “fast-track pre-approval framework” will alleviate concerns by corporates that do not bring foreign currency balances back to avoid the approval process for reinvesting abroad, he said.
“For the few corporates that we have engaged on this, the response has been very encouraging, with some even bringing back and converting immediately,” he added.
Dr Nambiar said it is important to note that businesses want the ringgit to be stable, noting that a weak ringgit has also helped Malaysia’s exports as product prices become more competitive and affordable.
According to the central bank, Malaysia saw higher economic activity in the first quarter of 2024, driven by resilient domestic expenditure and a positive turnaround in exports.
Dr Nambiar also predicted tourist arrivals to increase in June as tourists from places like China and India look to escape the intense heat, a point the Finance Ministry said will increase the ringgit’s demand and strengthen its value.
“It is best that we leave matters as they stand and not proceed to institute capital controls,” Dr Nambiar said, referring to measures that directly manipulate or control interest rates.
“I think the authorities will have little need to introduce more intrusive measures because we can expect exports to be more vibrant in the second half (of the year).”
