Hold steady on the ringgit

 

The recent comments by Bank Negara Malaysia (BNM) governor Abdul Rasheed Ghaffour that the ringgit should be higher based on fundamentals is correct.

This is not a shift in policy or position because his predecessor Nor Shamsiah Mohd Yunus made similar observations when the ringgit weakened before, following which it strengthened.

BNM does not reveal their preferred long-term ringgit value but the governor’s comments align with the market consensus that the underlying exchange rate should be stronger. This is a perfectly conventional and sensible position.

It also reminds people that you will not get RM4.70-RM4.80 to the US dollar for long, so better to take advantage of it now before the ringgit reverts to more normal levels as it has done so often in the past.

Many factors affect the value of the ringgit. The depreciation in the last few days reflects market noise, sentiment and reactions to news or an absence of it.

Investors see better news and returns overseas so they sell ringgit to buy dollar assets. They might also see bad news around the world and buy US dollars or Singapore dollars as safe havens.

They do not see very much good or bad news about Malaysia to change their minds on that for now.

The depreciation has caused overshooting so the current spot exchange rate is lower than underlying factors suggest it should be.

Normally the market will correct this when it looks again at the fundamentals. At the moment investors are speculating rather than looking at fundamentals.

Fundamental economic conditions in Malaysia are sound with well-managed monetary policy and interest rates, stable fiscal policy, slower inflation, lower unemployment and higher economic growth compared to other countries. Growth in 2023 was 1.1% in Singapore compared to 3.7% in Malaysia.

Ironically Malaysia is a victim of its own success because inflation was lower here than elsewhere. Prices elsewhere, in dollars for example, have risen so you need more dollars to buy the same products. To get these you sell ringgit.

Due to lower inflation here interest rates have been lower. This creates an interest rate differential compared to other countries and so funds flow to higher interest rate options, investors sell ringgit to buy dollars and invest in higher interest rates in US for example.

Reversing this implies raising interest rates here, which is clearly harmful to growth and borrowers. There is also no reason to raise interest rates when inflation is slowing.

Essentially the inflation and interest rate cycle here has been better than most places and is not synchronised so you get an overshooting exchange rate which is the shock absorber for these effects.

So BNM can only help to maintain financial stability in line with its mandate by making sure markets are stable and there is a good inflow of funds. This is what it is doing now and it is a sound policy.

To do this BNM has intensified engagements with companies and investors to encourage inflows into the foreign exchange market. This is good advice because the ringgit is undervalued and will appreciate soon.

Malaysian companies make investments and profits overseas in dollars and other foreign currency. If they repatriate it now this will create demand for ringgit and support its value so the exchange rate will appreciate.

This is not the first intervention like this. BNM regularly involves itself in the markets to make sure there is investor interest and liquidity in ringgit trades and to ensure anyone who wants to buy ringgit can find a supplier.

This is part of its mandate to create financial market stability. - FMT