UBS sees ringgit weakening this year, before recovering in 2020

According to UBS senior economist for Asean, Edward Teather, the group

PETALING JAYA: The ringgit could weaken to as much as 4.4 against the US dollar this year before recovering in 2020, predicts UBS Investment Bank.

The international brokerage’s projection for the local currency is one of the most pessismistic to date vis-a-vis a Bloomberg poll of 38 economists that put the median forecast for the ringgit to average at 4.1475 against the US dollar this year before appreciating further to 4.01 against the greenback next year.

According to UBS senior economist for Asean, Edward Teather, the group’s projection for a weaker ringgit was not just because of the US Federal Reserve (Fed) rate hike but also because of the fact that Malaysia is a relatively open economy.

“We find open economies’ currencies tend to come under downward pressure when trade data is surprising on the downside,” Teather explained. “And we expect the trade environment (for Malaysia) to surprise on the downside in early 2019 because of the US-China trade war... so expect that to be a bit of a drag on the ringgit in the immediate future,” he said during a press conference call yesterday.

Teather said UBS expected the US Fed to raise its interest rates only one time this year, and that would happen in September. It expected the US Fed to stand pat on rates in 2020. For the Malaysian economy as a whole, UBS projected the gross domestic product (GDP) growth to slow to 4% in 2019, from the expected 4.7% for 2018.

This compared with the country’s GDP growth of 5.9% in 2017.

It cited the impact from the US-China trade war, slower growth of China’s economy and a drag from the new government’s institutional reform and fiscal consolidation policy initiatives as main reasons for the weakness in GDP growth.

Teather noted while institutional reforms will be positive in the longer term, they would come at the expense of near term uncertainty.

For 2019, besides a weaker external environment, Teather said Malaysia would also see slower domestic demand.

“We are cautious on investment spending that we think will slow down this year. We also expect private consumption to slow down because much spending was brought forward in 2018 in order to take advantage of the low tax period as a result of the reduction in goods and services tax (GST) to zero,” he said.

By 2020, each of these drags on Malaysia’s growth should diminish, Teather said, noting that the impact of the trade war and institutional reform should go from drags on growth to net positive contributions. So, he said Malaysia’s GDP growth should return to its trend range of 4.6%-5.0% by 2020.

In general, Teather summed up 2019 as being a case of “pain before gain” for Malaysia.

For one thing, it would expect Malaysia to be impacted by trade war-related disruption, but also to be well placed to subsequently take market share from China in the US.

For another, it said, the Pakatan Harapan (PH) government’s institutional reform agenda looked likely to depress near term investment relative to prior expectations.

Longer term, though, PH’s institutional reforms, together with the country’s membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), would improve prospects in 2020.

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