Foreign Fund Outflows and the Ringgit’s Future!

There are several factors that influence currency movements. These may include interest rate differentials (local and overseas) inflation differences, trade balances, services contribution or otherwise, foreign funds flow (FDIs) sentiments on GDP growth, perceived political stability, currency quantum and velocity, amongst others. A factor not usually quantified is speculation – the trading perceptions of forex institutions/banks.

In more recent years, foreign fund flows have proven to impact Malaysia’s ringgit. A net inflow of foreign funds will strengthen the currency and conversely a net outflow weakens it. Foreign fund flows can be semi-permanent form like investments into factories, offices or other assets. The fluid form is “hot” money – funds into equities or bonds on the Bursa. This moves with perceived returns between developed and emerging markets.

Since the 1MDB crisis in 2015, Bursa has faced more outflows than inflows. Only 2017 saw a net inflow. Up until July 2021, net selling by foreign investors on the Bursa has stretched to 18 consecutive months. In the first seven months of 2021, Malaysia recorded a total of RM5.5 billion in net outflow of foreign funds. The market cap of the Main Board has been erased by 4.5% over the same period. Average daily trading volumes have fallen by 15% to 5.1 billion units while daily trading values fell by 10% month-on-month to RM3.1 billion in July 2021. This is according to CGS-CIMB Research.

Over next 12 months, the ringgit may trade in the RM4.20-RM4.30 to the dollar. This is the view of Alliance Bank’s chief economist. There are external and internal factors for this, but we can somewhat control the internal ones – political stability, MCOs, interest rates, economic recovery and so forth. The external ones include oil price, US Fed’s stance on rates, recovery plans and GDP growth differentials of major developed markets and others.

We need to review re-opening plans (of the economy), recovery measures, have more accommodative private sector investment policies and more clarity on the political situation. Unless we have a good mix that releases private sector entrepreneurial flair we will have muted, mediocre growth in 2022.

Reference:

The ringgit’s future, Cecilia Kok, Starbizweek, 7 August 2021