RINGGIT SURGES: ECONOMIC REFORMS, POTENTIAL US RATE CUT PROPEL CURRENCY TO BE ASIA'S SECOND BEST PERFORMER

By Zufazlin Baharuddin & Anas Abu Hassan

KUALA LUMPUR, July 12 (Bernama) -- The government's commitment to economic reforms and continued optimism about possible shrinking interest rate gap between Malaysia and the United States (US) have contributed to the ringgit’s favourable performance, according to analysts.

The ringgit now stands as the second best-performing currency in the Asian region, with year-to-date number showing that it depreciated by only 1.66 per cent against the US dollar, behind the Indian rupee which eased by 0.39 per cent, according to Bloomberg data.

The Brunei dollar and Singapore dollar each eased 1.70 per cent respectively, the Chinese renminbi was down 2.12 per cent, the Indonesian rupiah fell 4.57 per cent, the Philippine peso dropped 5.15 per cent, the Thai baht decreased 5.35 per cent, the Taiwan dollar reduced 6.05 per cent, the South Korean won weakened 6.20 per cent and the Japanese yen tumbled 11.40 per cent.

At 6 pm today, the ringgit traded firmer at 4.6700/6730 against the US dollar from Thursday's close of 4.6855/6895. During the trading day, the ringgit touched an intraday high of RM4.6630 versus the greenback and retreated to RM4.6757 later in the afternoon. 

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the economic reforms momentum in Malaysia has received greater attention from the global investing community and has supported the currency.

“We saw positive reviews from the credit rating agencies with Fitch Ratings maintaining Malaysia’s sovereign credit ratings at BBB+ with a ‘stable’ outlook.

“And the most recent news related to the upgrade of the country’s rating by JP Morgan from ‘underweight’ to ‘neutral’ is also a main reason for the ringgit performing quite well,” he told Bernama.

JP Morgan credited the country’s policy reforms, data centre investments and infrastructure build-up for the rating upgrade, the first in over six years.

In an interview with CNBC, JP Morgan head of Asia-Pacific (ex-Japan/China) Rajiv Batra said Malaysia’s rapid pace of progress was impressive with a 4.2 per cent gross domestic product growth in the first quarter of 2024.

“What was more exciting for us was that all the signs were evident last year. Earnings growth almost tracking a 10-11 per cent mark was an upside surprise. We need to give credit to the country, and hence we upgraded our rating to neutral,” he said.

Rajiv also spoke about how Malaysia took bold measures in rationalising subsidies, including the recent one on diesel, and highlighted that those who are in need are given monthly cash assistance.

Ringgit outlook

Mohd Afzanizam said the ringgit is anticipated to settle within the range of around 4.55 by year-end, considering the United States Federal Reserve's (Fed) widely anticipated interest rate cut as soon as September this year. 

Nevertheless, he noted that Fed chair Jerome Powell’s recent remarks to the US Congress suggested that the central bank is on track to cutting rates should economic data warrants for such a response whether the inflation number falls below two per cent or not.

The Federal Funds Rate (FFR) is now 5.25 - 5.5 per cent. The Overnight Policy Rate (OPR) in Malaysia is at 3.0 per cent.

“It seems like a risk-on mode as the Fed is on track to reduce the FFR in September.

“The prospect of lower interest rate differentials between the FFR and OPR will be the driving force for a strong ringgit in the near term," he told Bernama. 

The next round of rationalisation involving RON95 petrol will be a critical leap for the government.

“It is quite critical, but of course it's not popular. If the government can pull it off, the markets would actually give a favourable response by way of further exposure to our market,” he said.

Prime Minister Datuk Seri Anwar Ibrahim, who is also the Finance Minister, recently said that the government is yet to decide on RON95 subsidy rationalisation.

As for the downside risk for the ringgit, Mohd Afzanizam attributed it to the possibility of the Fed not cutting rates.

“They might or might not do it (lowering rates) because there are still some members that are quite hawkish and are so determined to achieving the two per cent (inflation) target,” he explained.

Economic progress to continue

Echoing the sentiment, UOB Kay Hian Wealth Advisors head of investment research Mohd Sedek Jantan anticipated that Malaysia’s economy will continue to progress, considering the current economic conditions.

“The implementation of fiscal policies including the improvement in governance along with subsidy rationalisation is expected to improve the fundamentals of the local economy. This positive trajectory is likely to contribute to the strengthening of the ringgit,” he said.

Mohd Sedek said the move by Bank Negara Malaysia’s Monetary Policy Committee to maintain the OPR at 3.00 per cent was widely anticipated by the market.

This will likely provide support to stabilise the ringgit's value in the near term and avoid any significant market shock, he added.

-- BERNAMA