Bank Negara Malaysia (BNM)’s new governor has a big issue to deal with. The local unit is at a seven-month low against the US dollar. It has weakened against other major European units and the Singapore dollar since February as interest rate cycles went into high gear there.
The weakness of the ringgit prompted BNM to come out to state the currency is undervalued at RM4.67 against the greenback. Is it a warning to traders? With some US$115bil (RM536bil) in international reserves, the hint of an intervention has slowed the sell-off of the local unit. And is UD115m enough to stem the tide?
The daily foreign exchange (forex) average turnover volume in 2023 has already surpassed US$15.1bil (RM70.6bil), which suggests our net foreign reserves (excluding foreign currency loans and net forward/futures trades) are only five times the daily average volume. So, intervening in the forex market to support the ringgit may not be the best option.
The Bank of Japan for instance spent US$65bil (RM303bil) in 2022 on direct purchases of the yen without much success as the currency is back retesting its three-decade-lows of 150 yen levels to the greenback again.With the close trade and investment ties with China, Bank Negara is likely more concerned about the ringgit and yuan pair rather than the dollar and ringgit rate as the hawkish Federal Reserve (Fed) is driving the dollar demand in Asian foreign exchange.
Source:https://www.imoney.my
The yuan has to contend with its own issues with the Chinese economy underperforming investor expectations and foreign companies moving treasury operations out of Greater China to locations like Singapore due to the geopolitical tensions between the West and Beijing.
Can the ringgit go lower? It could as the US dollar strength is likely to persist. Fed chairman signalled for even more rate hikes in the months ahead as US inflation remains elevated. That will only fuel demand for the dollar as American equity markets continue to hit new highs.
All the foreign exchange uncertainty is leading local exporters to retain their foreign currency holdings instead of converting to the ringgit.
But an interesting point made by Prof. Jomo K. Sundaram (Starbiz report on 14 July 2023) is the role of certain “powerful” speculators and Malaysians who hoard their cash abroad, which then exerts pressure on the ringgit. Surely, BNM knows of this?
Symbolic in nature, interventions typically offer better levels to sell the currency, traders say, adding that Bank Negara is well aware that the current ringgit weakness is due to external factors and US dollar strength.
The steady yields on Malaysian government bonds and steady prices of bank stocks on the local exchange is a sign there is no major issue in investor expectations about the government’s finances or concerns about the health of the local economy. Although foreign investors may be net sellers on local equities year to date, they remain net buyers on bonds.
The ringgit weakness, however, does point to a weak underlying demand for the local unit. The return of tourists following the lifting of restrictions on cross border movements has not translated to a significant number of inbound arrivals. The large foreign direct investment figures touted around also have translated to little gain for the local unit.
What could be key to the ringgit’s fortunes will be if exporters begin to sell their foreign currency holdings from export proceeds, which have grown to around US$26.5bil (RM123bil) or 15.3% of total banking deposits by businesses. For this to happen, it would likely require either a positive turn on the yuan or the Fed signalling a real pause and guide to rate cuts.
Another boost to the ringgit could come from local institutions and companies repatriating funds back home. For instance, the Employees Provident Fund could shift its strategy to invest more in local assets or even sell some of its foreign assets and repatriate proceeds, naturally creating actual local demand for the ringgit.
Given the ringgit’s weakness of late, a natural follow-up question is what are the implications for inflation and, by extension, Bank Negara’s monetary policy?
In a 2022 paper by Bank Negara, it is estimated that for every 5% depreciation of the ringgit versus the greenback, the exchange rate pass-through in the short run was 0.1% for core inflation and 0.2% for headline inflation.
There are several structural issues dragging down the ringgit. A weaker currency benefits a country is not wholly true – it is a limited boost – like taking a 100Plus. Malaysia’s current account balance to GDP ratio has deteriorated from 15.9% as at end 1999 to 1.0% as at 1Q 2023. This proves cheap does not mean good in the long-run. Value optimisation not cost savings should be our mantra!
Reference:
Addressing the currency decline, Bhupinder Singh, The Star, 1 July 2023
Time for reforms, Pankaj C. Kumar, The Star, 1 July 2023
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