Crucial to shore up confidence in the ringgit

KUALA LUMPUR: Chatter among economic circles has increasingly entertained the idea that a short-term broader measure to shore up confidence in the ringgit is becoming necessary.

This is as Bank Negara had recently said it is observing a concerning trend of increasing foreign currency holdings among Malaysian corporates, exporters and importers.

The ringgit had improved recently to become the best performer among Asian currencies this month; it was last traded at RM4.7330 to the US dollar yesterday.

While it had improved compared to other Asian currencies in the last month, it is still very close to its 26-year low, slipping past RM4.80 to a US dollar last month, and also close to its Asian Financial Crisis historical low.

Bank Negara had urged government-linked companies and funds to repatriate their overseas income and convert it to the local currency, which may explain the recent slight strengthening of the ringgit.

Veteran economist and Socio-Economic Research Centre executive director Lee Heng Guie said such interventions should not be encouraged but he noted that the current dire situation may warrant an exception.

“Apart from fundamentals, the market is also a matter of confidence and if a country’s own people are not confident in its own currency, who else will be left to defend it?,” an observer pointed out.

For Malaysia, economists have continued to say its fundamentals are sound while the currency remains undervalued.

“Extreme times call for extreme measures. We do not discount the likelihood to shorten the period of export proceed repatriation in full value from within six months from the date of shipment currently and also impose the export conversion rule, if the moral suasion or ‘encouraging’ the conversion of export proceeds does not yield the desired results,” Lee told StarBiz.

“However, these measures can be considered temporary to help ease pressure on the ringgit; it should not be made permanently as it increases transaction costs (exchange rate conversion) and reduces efficiency,” he added.

Lee also stressed that this should be done as a short-term measure and not be in place for the long-term.

“Do note that these administrative measures run counter to Bank Negara’s liberalisation of forex administrative rules to allow greater business flexibility and foster conducive environment for attracting foreign direct investment,” he said.

Meanwhile, Rakuten Trade head of equity sales Vincent Lau said perhaps the government can do more to encourage the repatriation of foreign currency holdings.

“This had been done long before. Some of these companies may keep foreign currency for working capital needs. Given the current situation, perhaps the government can provide some incentives for companies to keep some of their currency holdings in the ringgit,” Lau told StarBiz.

“This can be done as a temporary measure to shore up confidence in the ringgit since the country’s fundamentals are alright.”

In its report on Wednesday, MIDF Research said the ringgit is in a good fundamental position to strengthen in 2024 and 2025.

“External trade has indicated improvement and is set to rebound in 2024 while domestic demand conditions remain positive. Commodity prices are also in favour of the ringgit appreciating as crude petroleum and crude palm oil prices broadly rose in January and February 2024.

“With the domestic economy maintaining its positive momentum and the country’s status as a net exporter of commodities such as crude petroleum, liquefied natural gas and palm oil, the ringgit is poised to benefit from favourable global commodity prices and a continued trade surplus,” it added.