Structural reforms will boost ringgit, says BNM governor

 

Bank Negara Malaysia governor Abdul Rasheed Ghaffour says the central bank is seeking to ‘preserve confidence in the ringgit’.

PETALING JAYA: A concerted effort to implement much needed structural reforms will boost economic growth and pave the way for a stronger ringgit, says Bank Negara Malaysia (BNM).

“We continue to advocate for structural reforms which are critical to strengthen our growth prospects and encourage investments to provide more enduring support for the ringgit,” said governor Abdul Rasheed Ghaffour in BNM’s 2023 annual report released today.

He also noted that the government had launched several national reform efforts in the past year.

“In 2023, Malaysia embarked on several flagship policies and master plans – which include the New Industrial Masterplan 2030 and National Energy Transition Roadmap – to lay the foundation for sustainable growth,” he said, adding that timely and effective execution of these initiatives was “paramount”.

The government is pursuing structural reforms that will ensure fiscal sustainability, new growth areas, and increased growth potential, as well as enhanced labour productivity and competitiveness, the central bank said.

BNM said the government is also committed to ensuring fiscal sustainability through several fiscal reform initiatives, including the Public Finance and Fiscal Responsibility Act and Medium-Term Fiscal Framework.

Rasheed also stressed BNM’s resolve to “preserve confidence in the ringgit”. To that end, he said, it had recently increased engagements with key stakeholders to encourage inflows to ease the short-term pressure on the ringgit.

“In light of the challenging environment for the ringgit, we also continued to ensure sufficient liquidity and orderly functioning of the financial markets, so that businesses can be assured that their foreign currency needs can be met.

“We continued to use our policy levers to carefully manage complex policy trade-offs and interdependencies between the overnight policy rate, inflation, growth and the ringgit,” he wrote in the report’s foreword.

At the end of February, BNM announced that it had stepped up engagements with government-linked companies, government-linked investment companies, corporations and investors to “encourage” them to repatriate their foreign earnings to ease pressure on the ringgit. Since then, the ringgit has stabilised and strengthened against the US dollar.

The local currency slipped past 4.80 against the US dollar at the end of last month, its weakest level since January 1998 during the height of the Asian financial crisis.

Blame the Fed

Again, BNM put the blame for the weakening ringgit on external factors. Its Economic and Monetary Review 2023, also released today, said the movements of the ringgit since 2022 had been predominantly influenced by “cyclical factors”.

“The dominant short-term factor has been the aggressive monetary policy tightening by the US Federal Reserve and shifting financial market expectations surrounding the outlook for US monetary policy.

“The Fed raised its policy rate by a cumulative 525 basis points (bps) over the 2022–23 period to address the higher inflationary pressures in the post-pandemic environment,” it said.

Consequently, it added, demand for the US dollar rose significantly, leading to a rapid and strong appreciation of the US dollar and a depreciation of most regional currencies including the ringgit.

In contrast, BNM only raised its benchmark interest rate by 125bps during the same period, resulting in a 250bps differential with US interest rates and a huge outflow of funds to US markets.

Many other countries, including those in the region, also increased policy interest rates by a larger magnitude than Malaysia, resulting in some appreciation of their currencies against the ringgit, as acknowledged by BNM.

The central bank said given that these external factors are only short-term in nature, financial markets expect the pressure on the ringgit to abate.

BNM said it continues to advocate greater use of the local currency when settling export or import payments either via the Local Currency Settlement Framework or normal correspondent banking channels to reduce US dollar dependence. - FMT