An uphill battle for the Ringgit in coming week


  • AseanPlus News
  • Sunday, 31 May 2020

KUALA LUMPUR: The year 2020 has been gloomy so far, with dark clouds expected to continue casting shadows as the Covid-19 (coronavirus) pandemic carved its devastating path through economies worldwide, leading many to come face-to-face with recession.

Global unemployment rate had increased in April and May, especially in the United States (US) which saw more than 40 million of its people rendered jobless following business closures and a dearth in daily freelance work.

Malaysia, too, has been affected, as companies had to suspend their operations to contain the virus spread, causing the unemployment rate to rise to 3.9 per cent.

The full-blown crisis between Washington and Beijing could further stall economic recovery, causing risk aversion and volatility in the financial and commodities market, said Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid.

For companies, the right thing to do is to avoid getting tangled in the conflict via trade diversions.

"In this case, it is important for Malaysia to take full advantage of the situation by becoming more competitive in being an investment destination.

"Simplifying investment incentives should be the immediate priority as global companies who wish to set up their operations here would want the process to be convenient, seamless and reliable,” he said.

On Friday, the US President Donald Trump announced several retaliation measures for China’s alleged misdeeds, ranging from espionage to the violation of Hong Kong's freedom.

Trump had also announced US’ withdrawal from the World Health Organisation, citing Chinese control over the organisation.

Emerging markets (EM), including Malaysia, have been under intense pressure since early this year due to volatile oil prices, the pandemic, as well as recessions.

The increased tension between the two economic superpowers just added fuel to the flame.

On a year-to-date basis, the ringgit had declined from 4.0850 in January to 4.3450 last Friday.

The ringgit is not the only EM currency to face the sharpest downtrend in currency valuation over the past five years.

Many investors voiced concerns on the outlook for emerging nations' public finances as the drop in values of their currencies will increase their dollar-denominated debt burdens.

However, analysts are confident that businesses will slowly rebound under the new normal.

"As the new normal takes place globally, including Malaysia, companies are getting familiar with the work-from-home concept, and online shopping has become a routine for almost everyone.

"As such, businesses will slowly rebound,” said Mohd Afzanizam, adding that the ringgit should gain momentum towards year-end, backed by better visibility in terms of economic growth and corporate earnings.

As governments started to reopen economies from mid-May after a nearly two-month hiatus, economic indicators have been showing signs of stabilisation.

Mohd Afzanizam said the flash Composite Purchasing Managers' Index (PMI) for the month of May have increased for the US (36.4, April: 27.0), Eurozone (30.5, April: 13.6), United Kingdom (28.9, April: 13.8) and Japan (27.4, April: 25.8).

"In the US, the unemployment claims for the week ending May 16 declined to 21.0 million from 24.9 million the previous week, suggesting that more Americans have found employment following the reopening of their economy,” he said.

He added that such developments should be positive for Malaysian exports as external demand would gradually improve.

"The gradual reopening of the economy would mean more economic activities, and therefore, demand for labour would rise,” said Mohd Afzanizam.

However, he said that it would take some time for Malaysia’s unemployment rate to go down after the downturn in the second quarter, and expected the rate to stay at elevated levels in the region of 4.5 per cent to 5.5 per cent.

Since the Covid-19 pandemic had put a pause in economic growth, the federal government has been pro-active in implementing economic stimulus measures and remain open to increasing financial aids if the situation warrants such policy response.

With resuscitating economic growth as soon as possible being its primary goal, the Malaysian government has put policies in place to ensure continuous success in curbing the Covid-19 spread without further damaging the economy.

Bank Negara Malaysia (BNM) reduced the overnight policy rate to two per cent -- the lowest since 2009, and more liquidity has been injected into the economy to ensure credit availability and lower borrowing costs to facilitate economic recovery.

Data from the Department of Statistics showed that after posting its slowest growth since the 2009 global financial crisis, the country’s economy is set to slip into a recession in the next four to six months.

An analyst said that as the recession could not be averted, it is important for the government to place measures to boost financial liquidity in households to boost spending.

However, BNM said that the local banking sector will be able to withstand the pressure as it now has a total capital ratio of 18.4 per cent, with an excess capital of RM121 billion -- capable of withstanding potential credit and market losses.

"With the banking sector’s strength and government support, businesses -- especially small and medium-sized enterprises -- could arise from the ashes post-Covid-19, creating job opportunities,” she said.

However, she stressed that time is needed to heal the wound of previous losses, and economic as well as political stability would be crucial to attract quality foreign direct investment.

"Proactive measures must be taken, and plans to reconstruct the economy must be put in place especially in the next crucial period of one year,” she added. - Bernama

Economy, Currency, EM, Greenback, liquidity, stability
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Economy , Currency , EM , Greenback , liquidity , stability

   

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