Strong fundamentals and recent policy intervention have been supporting the ringgit, political uncertainty and subsidy costs pose risks but for now the strength is justified.
The ringgit has performed very well so far this year despite geopolitical uncertainty but in the last week it weakened around 3% to 4% against the US dollar, leading to some concern about its future direction.
Like all prices the ringgit exchange rate is determined by supply and demand in the marketplace, so to say the ringgit is overvalued or undervalued is a little misleading.
Its value is what the market says it is. It is affected by news during the day, policy in the short-term and relative fundamentals in the long-term.
Over the last 20 years, the ringgit has shifted from structural stability to a multi-year depreciation phase. In the last two years or so there has been policy-driven stabilisation and strengthening. The question is whether this can last.
Malaysia officially removed its fixed peg of RM3.80 to the dollar in July 2005 and moved to a managed float, in which the ringgit initially thrived.
The ringgit strengthened steadily, peaking at over RM3.03 to the dollar by early 2011. This was driven by high global oil and commodity prices, strong foreign direct investment (FDI), robust trade surpluses and healthy foreign reserves which made the ringgit one of Southeast Asia’s strongest currencies.
The tide turned sharply after 2014 as global crude oil prices fell dramatically, reducing Malaysia’s oil and gas revenue. Domestic political uncertainties surrounding the 1MDB sovereign wealth fund scandal severely dented investor confidence.
This triggered capital flight, causing the ringgit to sink below RM4.35 by 2016.
The post-Covid-19 period from 2022 onward was one of the most volatile eras in the modern financial history of the ringgit. From a baseline of around RM4.22 in 2022 the ringgit fell to RM4.79 by February 2024 and is now around RM4.06.
The main driver of the steep decline between 2022 and early 2024 was the aggressive interest rate differential against dollar assets as the US Federal Reserve hiked its benchmark rate from near-zero to over 5.25% to tackle Covid induced inflation.
Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) far more conservatively to 3% to protect the domestic economy.
This wide interest rate differential caused global yields to favour the US dollar heavily, encouraging investors to shift capital away from Malaysian bonds. This was compounded by a broader economic slowdown in China.
In response BNM took coordinated action to actively encourage government-linked companies (GLCs) and government-linked investment companies (GLICs) to repatriate foreign investment income and convert it back into ringgit.
This coincided beautifully with the easing of US monetary policy.
By 2026, these factors re-anchored the ringgit around RM4 to the dollar supported by strong fundamentals.
The story of the ringgit since February 2024 is one of policy intervention through the repatriation of overseas profits, strong economic growth and low inflation, record FDI inflows, record trade and tourism visitors, high oil prices and high palm oil prices and above all good management by BNM and fiscal conservatism which has restored confidence.
Under normal circumstances this can be expected to continue for the rest of the year.
External factors outside of the control of Malaysian policymakers will always influence the exchange rate but BNM has proved very effective in using non-interest rate policy to ensure liquidity in the ringgit market.
The real concerns on the domestic side are whether fiscal discipline will be breached as the fuel price subsidies continue to test the budget provisions and whether domestic political manoeuvres force an election with an uncertain outcome.
Either or all of these could cause a correction in the ringgit toward the RM4.20 to RM4.40 range but for now these risks are known and priced in. - FMT
The views expressed are those of the writer and do not necessarily reflect those of MMKtT
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