Budget 2022 to boost ringgit but tapering risk remains

Risks that are beneficial to the ringgit are strong CPO prices and higher OPR

by S BIRRUNTHA & ANIS HAZIM / Pic by MUHD AMIN NAHARUL

THE tabling of Budget 2022 is expected to be constructive for the ringgit as the expansionary stance is set to provide a positive fiscal impulse to the economy.

The ringgit strengthened against the US dollar to RM4.139 last week from RM4.148 the week earlier ahead of the budget.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the next support level for US dollar/ringgit pair will be 4.12 compared and then 4.1.

“We are constructive on the ringgit with a year-end target of about 4.15, and next year we are looking at around 4.09. Save to say the trajectory is on the apparition mode,” Mohd Afzanizam told The Malaysian Reserve (TMR).

The local unit is getting strength from firmer commodities prices for crude oil and crude palm oil (CPO), he added.

“If the commodity prices remain strong, it will be good for the ringgit,” he noted.

CPO price has rallied to a historic high of RM5,220 a tonne last month on bullish demand supply fundamentals in the edible oils market. The benchmark CPO futures contract closed the trading week RM5,023 last Friday.

Bank Negara Malaysia is expected to be upbeat in its economic assessment moving forward which means that the Overnight Policy Rate (OPR) could be higher next year.

“Higher OPR will be positive for the ringgit as well. So, these are the two key reasons why we think the ringgit should be on a better trajectory next year,” Mohd Afzanizam said.

AmBank Group chief economist and head of research Dr Anthony Dass said the rollout of Budget 2022, 12th Malaysia Plan (12MP) and the potential reset policy would provide positive support to the ringgit.

He said the local unit depreciated by 2.3% in the third quarter of 2021 (3Q21) while on a year-to-date basis it fell by 3.6% due to the rise in Covid-19 cases in the country.

“Looking into 2022, our base case scenario supports a stronger ringgit on the back of improving domestic economic activities, net foreign portfolio inflows, healthy management of the Covid-19 cases and a third booster jabs, as well as

domestic political stability which translates to effective implementation of policies from 12MP and Budget 2022,” he told TMR.

As such, he expects the US dollar/ringgit pair to trade around 4.08 to 4.12 levels by the end of the year.

According to Dass, the US dollar/ ringgit still risks retracing higher as uncertainties remain in the global and domestic front due to impact of the pandemic, while the ringgit remains at risk to a broad recovery in the USD if the US Federal Reserve’s (Fed) normalising plans come into focus and in the event of unforeseen external shocks or domestic surprises.

“Slower than expected domestic growth, domestic political noises, policy inconsistencies and slow implementation, downgrade risk driven by fiscal consolidation and public debt and external headwinds pose challenges.

“On that note, the US dollar/ ringgit pair could trace higher by the end of 2021 to levels of 4.20 or even as high as 4.25 levels,” he said.

Kenanga Research economist Afiq Asyraf Syazwan Abd Rahim expects the ringgit to gain in the immediate term on the back a feel-good sentiment post budget but weaken again as the Fed meet later in the month on its policy direction.

“The ringgit can go down to 4.13 by this week but the Federal Open Market Committee’s (FOMC) meeting for the month of November will see the tide go against the ringgit,” Afiq told TMR.

He expects the Fed to announce the tapering during the upcoming FOMC meeting.

“If the Fed announces tapering, it will bring negative news for the Asian exchange rates especially for China’s yuan as well as ringgit,” he said despite Budget 2022 expected to boost the ringgit’s outlook.

The ringgit is expected to get a boost from the foreign direct investment projection from the government together with high GDP at 6.5% for next year.