Is Malaysia’s economy decaying and as a result, has it been reflected in the domestic currency depreciation? No, we don’t think so
by IFAST RESEARCH TEAM / pic TMR
THE Malaysian ringgit shrank against the US dollar to close at RM4.63:1 as of Sept 30, 2022 as the US Federal Reserve (Fed) pledged to rein in the soaring prices. The deterioration has already breached the psychological level of RM4.6 per US dollar and it brings the currency closer to an all-time historical low of RM4.885 per US dollar during the Asian Financial Crisis of 1997.
In recent weeks, we have heard tons of negative news about the depreciating ringgit clouding the outlook for Malaysia. Nevertheless, is Malaysia’s economy decaying and as a result, has it been reflected in the domestic currency depreciation? No, we don’t think so.
Gradual monetary policy normalisation from BNM amid Fed’s hawkish stance
Amid the monetary policy divergence between BNM and the Fed, the US dollar, as represented by the Dollar Index (DXY), has appreciated by 17.2% YTD. Meanwhile, the US dollar has appreciated against the ringgit by 11.2% amid the narrowing interest rate differential between the Fed Funds Rate and Overnight Policy Rate (OPR).
At the same time, BNM International Reserves have been declining from US$107,184 million (RM496.26 billion) to US$99,839 million in August 2022. We believe that BNM has dipped into its foreign reserves to support the ringgit in recent months as the US dollar/ringgit has hovered around the same level from May to July 2022 whereas the Dollar Index has appreciated further.
In the face of uncertainties across the world, maintaining a flexible ringgit exchange rate is crucial to balancing the need to absorb external shocks with supporting the Malaysian economy. Even though Malaysia’s economic condition differs from that of the US Malaysia’s monetary policy would be constrained, and Malaysians would confront high borrowing costs if ringgit were pegged to the US dollar. Thus, we think it is unlikely, and the authority should not peg the ringgit to US dollar despite the recent ringgit depreciation as this move could cause substantial risks and significant trade-offs.
Ringgit is still strong relative to region peers
The decline in ringgit is also in tandem with the region’s peers, including Asean and some of the developed countries. The strong US dollar, supported by the Fed’s aggressive monetary tightening to curb inflation even if it means causing a potential recession in the US economy, has put pressure on the ringgit and other regional currencies on a relative basis. Although the local note has depreciated against the greenback on a YTD basis, it is still traded higher against a basket of major currencies.
Also, the heightened volatility across the board will cause emerging market currencies, such as ringgit, to be less attractive as investors look at a stronger currency, US dollar, in this case where it generates higher yields with better stability. Hence, we view the temporary drawback of the ringgit as not all doom and gloom, and it could be supported by the solid fundamentals of Malaysia’s economy.
Solid growth and healthy economic data supported Malaysia’s outlook
With the depreciating ringgit (alongside an appreciating US dollar), Malaysia’s production (both manufacturing and agriculture) is viewed as cheap by US and Europe which could boost our net export growth in the near term. This has been reflected in our second quarter of 2022 (2Q22) GDP, where Malaysia recorded 8.9% YoY growth and exports from Malaysia jumped stronger with the 13th straight month of double-digit growth in exports. As of the time of writing, Malaysia’s trade performance is still healthy and delivered a current account surplus YTD while the employment rate remains manageable, hovering around 3.8%.
Despite Malaysia Consumer Price Index YoY up 4.4% YoY in August 2022, we think the inflation rate is still showing a healthy level compared to global peers. We are seeing a downtrend of Producer Price Index from 11.6 in March 2022 to 7.6 in August 2022, denoting that the supply chain bottlenecks are showing an easing sign coupled with loosening global supply chain pressure.
Similarly in the US, we believe inflation is peaking thanks to the softening commodity prices, supply normalisation and high base effect. US inflation has been relieving from its recent peak of 9.1% YoY in June 2022 to 8.3% YoY in August 2022. The Fed remains committed to fighting inflation, as recently reaffirmed at the Jackson Hole meeting, during which Jerome Powell reiterated that the Fed is ready to inflict “some pain to households and businesses” and will likely follow through with higher interest rates to bring down inflation. As such, inflation is unlikely to stay at the 8%-9% level seen over the past few months and Fed’s aggressive tightening paths could defer if prices go back to normal level.
In the near term, given the tightening policy differential between the Fed and BNM, we think ringgit is going to weaken and the likelihood of achieving RM4.7:1 persists. Nevertheless, we are still positive about Malaysia’s economy, contributed by the solid fundamentals and consistent economic growth. However, political uncertainty came in followed by the widely anticipated GE15 and heightened geopolitical tension continued to be the wildcard to shake the investors’ sentiment in Malaysia in the pipeline.
The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.
- This article first appeared in The Malaysian Reserve weekly print edition
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