Analysts remain optimistic about the ringgit’s potential for appreciation this year, attributing it to positive developments and structural reforms initiated by the government, coupled with anticipated interest rate cuts in advanced economies.
The Malaysian ringgit has plunged to its lowest level since the Asian financial crisis, prompting concern from the country’s central bank, Bank Negara Malaysia (BNM) about its reflection on the improving economic outlook.
On Tuesday, the local currency briefly dipped below 4.8 against the US dollar, marking its weakest performance since hitting an all-time low of 4.8850 in 1998. The ringgit’s decline in 2024, exceeding 4%, is attributed to China’s sluggish economy impacting Malaysia’s exports, compounding losses from previous years.
Bank Negara Malaysia Governor Abdul Rasheed Ghaffour expressed the central bank’s view that the current ringgit level does not accurately mirror the positive prospects for Malaysia’s economy. He emphasised that external factors have influenced the recent performance of the ringgit, aligning it with other regional currencies.
Despite these challenges, Abdul Rasheed highlighted factors driving growth, including a rebound in external demand and robust domestic spending. Malaysia’s exports have displayed steady improvement since the fourth quarter, with January witnessing an 8.7% year-on-year growth, breaking a streak of 10 consecutive months of contraction.
The tourism industry has exhibited a strong recovery, with 2024 arrivals projected to surpass pre-pandemic levels of 26 million. Additionally, investment momentum has surged with the implementation of approved projects in both the private and public sectors.
Analysts remain optimistic about the ringgit’s potential for appreciation this year, attributing it to positive developments and structural reforms initiated by the government, coupled with anticipated interest rate cuts in advanced economies.
Market observers are closely monitoring the latest inflation data to gauge Bank Negara Malaysia’s ability to maintain interest rates. Despite closing 0.2% lower at 4.7987 per dollar in Kuala Lumpur, the ringgit is expected to strengthen, supported by potential interest rate cuts by the Federal Reserve and the absence of significant geopolitical events.
Malaysia’s second finance minister, Amir Hamzah Azizan, emphasised that the country no longer needs to peg its currency to the dollar, citing favourable reserve bases, debt exposure, and financial liquidity.
The trajectory of the world’s reserve currency will influence whether the ringgit falls to a record low against the greenback. While short-term projections suggest a drop beyond 4.80, experts believe it unlikely to breach its all-time low, given expectations of waning US dollar strength.
However, uncertainties loom regarding the ringgit’s trajectory against the greenback, contingent upon the performance of the world’s reserve currency. Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore, believes that while the ringgit may sustain a drop in the near term, breaching its record low is unlikely as the strength of the US dollar is expected to diminish.
Amid slower-than-expected economic growth, Malaysia faces risks both domestically and externally. Weakness in exports to China and prolonged manufacturing activity below the expansion threshold underscore challenges in the economic landscape.
Neighbouring Thailand’s disappointing growth further compounds regional concerns, prompting calls for an emergency rate cut from the Bank of Thailand. However, investors’ anticipation of dovish moves has led to the baht underperforming among emerging Asian peers this year.
With foreign bond outflows totalling $382 million in January, the largest in five months, Malaysia’s growth trajectory for 2024 remains uncertain, impacting support for the local currency.
The Malaysian ringgit’s recent decline reflects broader economic challenges facing the country, but the optimism persists amidst efforts to stimulate growth and address structural issues. As Malaysia navigates through uncertainties, including external pressures and domestic vulnerabilities, policymakers and market participants alike remain vigilant, seeking opportunities for resilience and recovery in the face of adversity.