Will Budget 2024 help the ringgit?

 

The ringgit has fallen to levels near its all-time low against the US dollar and as usual this is causing alarm in some quarters.

The main drivers of the exchange rate at the moment are the same as they have been for most of the year — geopolitical uncertainty and a move to safer financial investments in established markets.

This is now worse than before because of the Middle East conflict and nothing much can be done to mitigate the effects of that.

The performance of the ringgit along with other regional currencies also continues to be driven by external factors, especially expectations for the US federal funds rate (FFR) to remain higher for longer.

The FFR, currently at 5.5% or a 2.5% premium over the overnight policy rate (OPR) in Malaysia, and a higher differential between 10-year Malaysian MGS and US Treasuries at 0.85% continue to drag on investor sentiment and see foreign funds reallocated out of Malaysia.

This is matched by reallocation of funds out of Malaysian equities, leaving a deeper impact on the ringgit.

Weaker economic performance in China and monetary policy easing by their central bank has raised negative investor sentiment for the region.

Nonetheless China remains a major trading and investment partner for Malaysia and it is too early to talk of reducing that link.

Of course, exchange rate movements have costs and benefits. With a weaker ringgit Malaysian exports are cheaper but imports are more expensive.

Recent trade data shows a continued surplus despite the global downtrend and it appears that the weaker ringgit is helping exports. By contrast, higher import costs do not appear to have too much of an impact on inflation.

However we should now consider some of the longer trends in the weakness of the ringgit over many years. For example a decade ago the ringgit was around RM3 to the dollar.

Since 2015 it has been persistently above RM4 to the dollar and since January 2022 between RM4.20 and now RM4.77.

There is even some chance that it might weaken further to RM5 to the dollar. So there may be more structural issues over the long-term.

Nonetheless the current weakness in the ringgit has little to do with current domestic factors. The economic fundamentals remain strong and structural reforms by the government will help.

Budget 2024 has raised spending but also managed to cut the deficit. There are clear savings from subsidy reform, especially in utilities for example and a commitment to further subsidy rationalisation in the future.

New initiatives under the revised 12MP Mid-Term Review should improve investor confidence in the medium to long-term.

In addition, Bank Negara Malaysia can use multiple monetary policy tools to address the weakening ringgit. For example it can intervene to ensure there is sufficient ringgit liquidity by buying and selling as a last exchange provider.

It can also ensure the stability of the overall financial system and it can encourage the speedier repatriation of overseas profits from trade and investment in foreign currency. This would create demand for ringgit and support the market.

Otherwise there is very little the government can or should do. Controlling the exchange rate is not really an option for Malaysia as it is in Singapore and Hong Kong so apart from focusing on strengthening fundamentals economic policy has to allow the exchange rate to act a shock absorber or automatic stabiliser.

To strengthen the ringgit the only real thing is to clarify policy, ensure market liquidity and maintain sound fiscal and monetary policy conditions to promote price stability and sustainable growth and investment. Holding to this is the best lesson to be learned from the past. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.