Ringgit has been unfortunate, unfairly assessed vs US dollar -BNM

KUALA LUMPUR: The continued uncertainties over China’s economic growth prospects and the recent geopolitical crisis have increased US dollar demand as a safe-haven asset, said Bank Negara Malaysia (BNM) deputy governor Adnan Zaylani Mohamad Zahid.

“Much has been made of the performance of the ringgit against the US dollar. Unfortunately, many see and use this as an indicator or barometer of how we are doing.

“This is an unfair assessment as it ignores the overall currency performance, the strength and fundamentals of our economy and the outlook going forward,” Adnan Zaylani said as a panellist at the National Economic Forum (NEF) 2024 organised by the National Chamber of Commerce and Industry (NCCIM) here today.

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He said the ringgit has traded stronger against the Japanese yen, the Taiwanese dollar and the Korean won since the beginning of 2022. It weakened marginally against the Chinese renminbi, the Indonesian rupiah and the Indian rupee.

“This affirms that we are facing a US dollar strengthening cycle, a US dollar story, and not a ringgit weakness story.

“From a growth perspective, Malaysia continues to register expansion and rising economic activity accompanied by low and stable inflation,” he said.

Adnan Zaylani said while the ringgit is expected to reflect the country’s fundamentals in the long term, it will face headwinds in the near term from the strength of the US dollar.

“The high and tighter US interest rates will continue for some time. This has influenced behaviour among investors, corporates, exporters, importers and the public. For example, there is a greater interest to invest in foreign currency assets.

“Additionally, exporters could favour holding foreign currencies while importers front-load purchases and some corporates even accelerate foreign currency debt repayments,” he said.

This sets the tone for a weaker ringgit, further reinforcing the trend, he said.

Excessive depreciation is costly for businesses that rely more on imports.

“It also perpetuates a negative sentiment towards our economy and markets,” he said.

Elaborating on how BNM will break this trend, he said the central bank must first deploy its primary tools to preserve stability and prevent excessive depreciation.

“We have been intervening – selling foreign currencies and buying ringgit – and we have been doing so for some time,” he said.

Secondly, BNM is working with government-linked investment companies (GLICs) and government-linked companies (GLCs) to repatriate and convert their foreign incomes.

Thirdly, it is working with corporates and exporters to bring back their income and proceeds and to manage their investments abroad and foreign currency balances, he said.

For instance, he said many corporates found it more expedient to retain foreign currency balances abroad to avoid the approval process for overseas reinvestment.

He said BNM is working on an initiative to fast-track a pre-approval framework for corporates who convert their foreign currency funds into ringgit to enable them to re-invest abroad later on.

The response has been encouraging with some immediately converting their foreign funds into ringgit, he said.

He said the global interest rate will “turn” eventually, with the outlook on the ringgit “looking strong,” he said.

Meanwhile, Adnan Zaylani said some inflation risk could arise from the government’s subsidy rationalisation. It expects the risks to be temporary if it materialises.

“More importantly, the subsidy rationalisation itself will be a major step forward. With the fiscal reforms already committed to by the government, this will further consolidate the fiscal deficit.

“The near-term outlook is solid as we are already seeing recoveries in our exports and external trade, strengthening of tourist arrivals and continued progress from many of the multi-year investment projects by both the public and private sectors,” said the deputy governor.

He also said the National Energy Transition Roadmap (NETR) and the New Industrial Master Plan 2030 (NIMP 2030) will guide the country over the longer term.

Since 2010, foreign direct investments (FDIs) by non-residents have yielded better returns consistently compared with residents’ investments abroad, he said.

Over the past two years, the average return on FDIs stood at 11.6 per cent versus 7.5 per cent for residents’ investments abroad, he said.

“The numbers speak for themselves: it makes business sense to focus on investing your capital locally,” he said. – BK