Experts said the Malaysian government has taken steps that have resulted in a stronger ringgit. ― Picture by Miera Zulyana
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Thursday, 06 Jun 2024 3:30 PM MYT
SINGAPORE, June 6 — As any Singaporean crossing the Causeway recently may have noticed, Malaysia’s currency has jumped quite a bit against the Singapore dollar lately.
The ringgit hit an all-time low of 3.57 against the Singapore dollar on February 21. Today, it was trading at about 3.49.
That’s a gain of about 3.4 per cent in under four months, reflecting the fact that the ringgit has been one of Asia’s strongest performing currencies.
For Singaporeans on a shopping expedition to Johor Bahru or perhaps considering a property investment, that’s a hefty currency movement.
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The world of foreign exchange can be complex, driven by many factors such as interest rates, economic fundamentals, global events and the mood of investors.
TODAY spoke to economists to take a closer look at the reasons for the ringgit’s rebound, how long it might last and the outlook for the exchange rate between the ringgit and Singapore dollar.
Has the Malaysian government acted to shore up the ringgit?
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Experts said the Malaysian government has taken steps that have resulted in a stronger ringgit.
These include encouraging government-linked companies and government-linked investment companies to bring back overseas earnings and convert foreign money into ringgit more often.
The Malaysian government is also building greater investor confidence by generally communicating more about its assessment of the economy and markets.
For example, the nation’s central bank, Bank Negara Malaysia (BNM) said on May 9: “The ringgit currently does not reflect Malaysia’s economic fundamentals and growth prospects.”
All things being equal, a strongly performing economy will generally result in a stronger local currency.
How has the ringgit moved since February?
Senior foreign exchange strategist Peter Chia at United Overseas Bank said the ringgit regained its footing to be the best-performing Asia currency in the second quarter to date, gaining 0.5 per cent against the US dollar while other Asia peers slipped.
The US dollar is the currency often used as a benchmark for comparing global currencies.
Malaysia’s Finance Ministry said in a post on X on May 26 that the ringgit recorded the best performance against the US dollar among 10 regional currencies as of mid-May.
From February 26 to May 17, the ringgit strengthened 2 per cent against the greenback, while the Singapore dollar, Chinese yuan, Indian rupee and Thai baht slid by 0.2 per cent, 0.4 per cent, 0.7 per cent and 1 per cent, respectively.
The South Korean won, Taiwanese dollar, Indonesian rupiah, Philippine peso and Japanese yen fell between 1.9 per cent and 3.4 per cent over the same period.
What explains the ringgit’s rise?
“A key driver of the outperformance was concerted measures by the BNM to encourage conversion of foreign exchange income held by government-related companies, corporates, exporters, and investors into MYR (the Malaysian ringgit),” said Chia.
By converting foreign currencies back into ringgit, the demand for ringgit in the foreign exchange market increases, leading to its appreciation against other currencies.
Agreeing, Maybank’s chief foreign exchange strategist Saktiandi Supaat said the ringgit has been among the best regional performers to date given the mix of favourable domestic and external factors.
“In the medium term, continued clear economic Madani goals can bode well for economic improvement and the Malaysian ringgit — these include fiscal consolidation and other goals; improvement in key macro fundamentals; improved tourism flows,” said Supaat.
Madani goals refer to a Malaysian government framework which focuses on sustainability, care and compassion, respect, innovation, prosperity, and trust.
Supaat added that BNM’s monetary policy committee has also stabilised the ringgit by keeping a benchmark interest rate known as the overnight policy rate (OPR) at 3 per cent.
The OPR is the interest rate set by the central bank that banks use when they lend money to each other overnight. It influences rates that banks charge consumers and businesses, affecting loan and mortgage rates, for instance.
This decision marks the sixth consecutive meeting where the OPR has remained unchanged. Back in April 2022, the rate was 1.75 per cent as the central bank tried to stimulate the economy with cheaper loans.
Supaat forecasts that the OPR for the BNM will be maintained at 3 per cent for the rest of 2024.
Higher official interest rates generally buoy up a currency’s value, all things being equal.
In addition to the BNM’s intervention, OCBC’s chief economist Selena Ling said there have been more foreign investments in Malaysian equity, which continues to strengthen the ringgit.
She added: “The value of the US dollar has decreased since mid-April because recent economic data from the US has been weaker than expected.”
The ringgit’s recovery against the Singapore dollar can also be attributed to increased economic activity in Malaysia.
Supaat said Malaysia’s economy is expected to grow by 4.7 per cent in 2024 and 5.1 per cent in 2025, which is better than previously forecast.
He said the revisions are due to substantial private-sector investment over the past three years.
This has led to more construction of factories, data centres, industrial sites, and solar parks and increased spending on machinery and equipment, boosting imports of these goods.
This has also led to supporting ongoing infrastructure projects, such as the Johor Bahru–Singapore Rapid Transit System (RTS) Link, and the rollout of new ones, such as building the Penang LRT and airport expansions.
“This should reduce the pressure on BNM to cut (interest) rates and, in turn, together with an eventual US easing (of interest rates), help reduce the impact that the wide rate differentials have had on the MYR”, said Mr Supaat.
The phrase “wide rate differentials” refers to the difference in interest rates between two countries.
Higher interest rates in a country generally cause global investment flows to increase, as investors look to get better returns for their funds. This bolsters the local currency.
For example, if Malaysia’s interest rates are much lower than those in the US, the difference can influence currency values, as investors may prefer to invest in countries with higher interest rates to get better returns.
The current benchmark interest rate of the US central bank, the Federal Reserve, is 5.25 per cent to 5.5 per cent. The Fed is widely expected to cut rates later this year.
The outlook for the ringgit
Analysts expect the ringgit to continue to gain ground in the second half of 2024.
In addition to the US Federal Reserve cutting interest rates, Chia said the ringgit will “draw strength” from a subsequent rebound in China’s yuan in the second half of 2024 as China’s economy shows clearer signs of stabilising.
“Against the SGD, we expect MYR to hold on to recent gains and forecast the SGD/MYR pair at 3.48 by the end of 2024,” said Chia.
Maybank forecasts a stronger appreciation of 3.45 ringgit to the Singapore dollar by the end of 2024 and 3.32 by the end of 2025.
OCBC’s Ling expects the ringgit to be trading at about 3.46 ringgit to the Singapore dollar by the end of 2024.
What this means for Singapore
Analysts told TODAY that for both central banks in Singapore and Malaysia, global inflation and growth dynamics will shape the actions of each country.
Supaat said for Singapore, the Monetary Authority of Singapore (MAS) will keep the Singapore dollar strong until the end of 2024 due to high inflation and “some pick up in global growth outside of the US”.
Agreeing, Ling added: “MAS sees both upside and downside inflation risks and core inflation will only subside more significantly towards end-2024, while BNM opined that the inflation outlook is dependent on domestic policy implementation of subsidy rationalisation as well as global commodity prices and financial market developments.”
Ling said that while the ringgit continues to appreciate against the Singapore dollar, it will not deter Singaporeans from crossing the border to obtain goods.
She said that dollar for dollar, goods in Singapore are still markedly more expensive, and there is still a massive draw for Singaporeans to cross the border in search of more affordable options for daily necessities. — TODAY
