State polls played minor role in weakening ringgit, say economists

KUALA LUMPUR – Economists are downplaying the influence of last weekend’s state polls on the recent decline of the ringgit, suggesting that the elections had a minimal impact on the currency’s performance.

Malaysian Institute of Economic Research senior fellow Shankaran Nambiar acknowledges that the ringgit’s value has been on a downward trend since the conclusion of the state elections that took place.

However, he points out that the cause of this decline might not be solely due to domestic reasons.

Nambiar explains that international factors, including fluctuations in foreign currencies and overall economic stability, likely have had a more significant role in shaping the ringgit’s performance.

“The uncertainties generated by political speculation may have had a role, but perhaps not a significant one,” he told Scoop.

“It is more likely that the fall in the yuan and worries over the Chinese economy are factors that have impacted the strength of the ringgit.”

Given Malaysia’s reliance on exports, Nambiar said that a weaker ringgit could exert pressure on import costs, affecting industries that depend on imported materials.

Nevertheless, he considers this issue manageable, stressing that the government should focus on addressing the cost of living and implementing long-term economic reforms.

Nambiar also predicts a strengthening of the ringgit in the coming months, particularly in light of the upcoming Budget 2024 announcement, which is expected to boost economic confidence.

Bank Muamalat chief economist, Mohd Afzanizam Abdul Rashid similarly said that external events will be the main driver of the ringgit’s performance, instead of the polls.

“The state election may have minimal impact, especially when the present administration is expected to remain until the full term,” he said.

“For instance, this week, the market saw unexpected interest rate cuts by the People’s Bank of China (PBOC) by 15 basis points to 2.50%. This is the second rate cut by the PBOC.

“It gives the impression that China’s economy is in dire need of economic stimulus, as the economy is badly affected by the weaknesses in the real estate market.”

Afzanizam added that several property developers in China are struggling to service their debt, which then triggers loan defaulting.

With the yuan and ringgit closely correlated at 68%, he said any abrupt changes in China’s currency will directly impact the Malaysian currency.

Conversely, Afzanizam said the US economy enjoyed a healthy retail sales number in July, which was an increase of 0.7% from the month prior. This implied the likelihood that the US Federal Reserve will keep their interest rates higher and for longer.

Although the weakened ringgit is attributed to dampened international trade, economist Professor Yeah Kim Leng said it is counterbalanced by increasing foreign investment inflows.

As such, he projected that the ringgit will hold between 4.3-4.4 ringgit against one dollar by the end of the year.

Yeah, who is one of Prime Minister Datuk Seri Anwar Ibrahim’s advisors, said that a mild slowdown in income growth will slightly affect consumer spending, but expected consumption to remain resilient.

He added that various government initiatives to support low-income groups will also translate to bigger spending, which will, in turn, strengthen the ringgit.

Nonetheless, he believed that widely reporting possible political instability could bring down its sentiments, as parties who initiate instability will only be seen in a negative light.

“(It) creates negative sentiments and perception (towards the parties), which contributes to rising confidence in the economy,” he said.

“The population is suffering from fatigue for the last few years, so that could be a factor that results in less response in efforts to change the government,” said the Sunway University Business School academician. – August 18, 2023