Ringgit to rebound once Fed ends monetary tightening cycle

by S BIRRUNTHA / pic TMR FILE

THE ringgit has been on the lips of many as it reacts to the strong US dollar. It has been hitting fresh 24-year lows. How will the story end? Well, the ringgit is expected to recover the sharp drop in value against the dollar upon the end of the US monetary tightening cycle and improvements in domestic economic fundamentals. 

In the meantime, here are some of things that Malaysia should do and some areas the nation would be best advised to avoid. 

Sunway University Business School professor and economist Dr Yeah Kim Leng (picture) said a reduction in political risk premium, should the looming general elections result in a stable and reform-minded government, will also accelerate the recovery of the ringgit. The local unit has fallen by close to 20% since 2010 against the basket of currencies of its trading partners. 

Yeah added that the decline of the local note, which was already undervalued before the current strong US dollar cycle, is attributable to aggressive interest rate hikes and investors’ flight to safe haven due to rising global uncertainties. 

“The ringgit is projected to strengthen against the US dollar and dip below RM4.50 on the expectations of a pronounced slowdown or recession in the US economy in 2023. 

“Importantly, the domestic economy’s growth, inflation, financial conditions and fiscal metrics will also need to show improvement for the ringgit to stabilise and recoup its losses during the strong dollar cycle,” he told The Malaysian Reserve (TMR) in an interview. 

On whether currency intervention is needed, Yeah said improving the country’s macroeconomic fundamentals — such as strengthening public finance and facilitating private sector efficiency and productivity increases — are key pillars underpinning the ringgit’s strength and stability. 

In the short term, he said boosting exports to capitalise on the cheap ringgit, attracting foreign direct investments — including encouraging large private companies, multinational corporations (MNCs) and government-linked companies (GLCs) to repatriate foreign earnings and capital to invest locally — could boost capital inflows and increase short-term demand for the local note. 

“Where feasible, large capital imports could also be delayed to reduce dollar outflows,” he said. 

Echoing his views, Bank Islam Malaysia Bhd chief economist Firdaos Rosli said the ringgit will continue to be pressured by developments surrounding the Federal Open Market Committee meetings. Therefore, he noted that as long as there is no pause indication from the US Federal Reserve (Fed), the ringgit could be on a downward trend versus the dollar. 

“However, once the Fed slows down with their aggressive rate hike, which will be some time next year, I think we will see some stabilisation on the local note. 

“There’s nothing much the government or the central bank could do, because not just the ring- git but many other currencies are largely dependent on the movement of US dollar,” he told TMR. 

Malaysia University of Science and Technology professor and economist Dr Geoffrey Williams commented that the ringgit, along with all other exchange rates, will normalise in the long term in line with underlying economic fundamentals. 

“What we are seeing now is a dollar story with funds buying dollars due to the higher interest-rate environment, with an escalated risk due to the Ukraine conflict and the pipeline attack in the Baltic.” 

Williams stressed that these situations are very dangerous and outside the government’s control. 

“So, long-term outlooks are very speculative. We don’t know how long the depreciation of the ringgit will last because the risks due to the Ukraine conflict are worsening daily. In terms of the inflation scenario in the US, I expect this to ease towards the end of the year so policy tightening will also ease.” 

Williams stressed that interest rates and market interventions cannot be used to defend the ringgit, something Bank Negara Malaysia (BNM) has made clear. He added that policy cannot be driven by market speculation and random movements in financial markets and basically, nothing can be done about it. 

“The central bank must pursue their mandate of maintaining price stability and financial sector stability, while promoting sustainable growth. They have been cautious with small interest-rate increments so far to recalibrate the OPR (Overnight Policy Rate) and we are near the long-term average for that now,” he said. 

Williams also emphasised the government must support them with coordination of fiscal policy so as not to make life difficult for BNM. This means in Budget 2023 we must see lower spending consistent with sustainable growth and they must also follow structural reforms to help the supply-side become more agile and competitive and to promote growth. 

“Above all, the government must avoid a populist budget which increases overall spending and gives too many handouts ahead of the election, otherwise, we might see a repeat here of events in the UK which are harming the pound and raising interest rates,” he opined. 

Socio-Economic Research Centre (SERC) ED Lee Heng Guie agreed that the ringgit will remain under pressure against the US dollar for some time until the Fed is done with its tightening to tame inflation, probably by the first half of 2023 (1H23). He also said there are no quick fixes to fight the tide of the strong US dollar backed by the Fed’s aggressive monetary tightening. 

“BNM will conduct direct foreign-exchange (forex) intervention and by the US forward to moderate the ringgit’s depreciation. While the ringgit bears the brunt of downward pressure against the US dollar due to the anticipated widen- ing interest-rate differential with the US interest rate, BNM needs to balance between supporting the growth and anchoring inflation under its radar. 

“Raising interest rates too much may temper domestic demand, given that the households and businesses are already feeling the pinch of inflation, higher cost of living as well as increased business and operating costs,” he told TMR. 

Lee suggested for the government to direct GLCs to reduce importing goods (ie more local procurement) in the undertaking of investment projects to cut ringgit’s impact on the trade surplus. 

He said Putrajaya must also implement structural reforms, including fixing the budget deficit, bloated subsidies etc, to inspire investor confidence in Malaysia’s fiscal and debt sustainability. This will attract capital to Malaysia. 

“Ultimately, it is about ensuring confidence that Malaysia’s economic and financial fundamentals can support the ringgit over the medium term. BNM has to ensure an orderly functioning of the financial and forex markets, supported by ample liquidity to meet investors and businesses’ needs,” he added. 

In a comment shared at his LinkedIn page, BNM former deputy governor Dr Sukhdave Singh warned that if the global economy goes into a recession, economies like Malaysia will face multiple challenges in the form of a depreciated exchange rate, higher inflation, lower exports and lower domestic growth. 

As such, he said Malaysia can prepare for that eventuality by carefully calibrating its policy choices and focusing on reducing domestic vulnerabilities as much as possible. 

“The first of these policy choices will relate to managing the extent of the depreciation through a sharing of burden between interest-rate increases and forex intervention. Domestic indebtedness and government finances are clear areas of vulnerability.” 

He noted that fiscal policy has not been well-used in Malaysia, often aiming for political rather than economic outcomes. This has reduced fiscal flexibility and made public finance more highly dependent on debt. 

Additionally, he also stressed that economic resilience needs to be built in good times to prepare for times of adversity, and structural reforms are a very necessary component to lessen national vulnerabilities and build economic resilience. 

Sukhdave added that prudent management of the sources of national forex reserves, as well as large financial outflows, would also be within the scope of policies to manage the situation. 

“Currencies and economies are like boats floating in rough seas — those that are better built and have better sailors are less likely to capsize,” he said. 

The ringgit ended the month of September slightly higher. At 6pm last Friday, the local units improved by 20 basis points to 4.6360/6390 against the US dollar from 4.6380/6425 previously. 


This article first appeared in The Malaysian Reserve weekly print edition.