KUALA LUMPUR: Despite the optimism of the ringgit strengthening against the US dollar this year, the local currency is likely to stay weak against its Asean peers in the medium-term dragged down by structural weaknesses within Malaysia’s economy.
Omni Capital Partners Sdn Bhd managing director Scott Lim (pic) explained that the structural weakness in the economy stemmed from the ongoing brain drain in the country coupled with lower foreign direct investment (FDI) inflows compared to neighbouring countries as well as lower investment outflows.
“Our economy and country need to overhaul. We are facing big challenges such as losing talents and more FDI inflows to our neighbouring countries which signals that Malaysia is no longer the preferred FDI destination in the region.
“We don’t see the FDI figures like before, investments are flowing into our neighbouring countries like Singapore, Indonesia, Vietnam and even the Philippines is doing better than us. Malaysia is losing traction because of its policies that are driving away investments, ” he said.
According to the United Nations Conference on Trade and Development (Unctad), FDI into Malaysia plunged by more than two-thirds to just US$2.5bil last year, which was the worst drop in the region amid the Covid-19 pandemic.
In contrast, the Philippines transformed into Asean’s best performer last year, with FDI rising by 29% to US$6.4bil. Besides that, Singapore saw a 37% drop to US$58bil, still comfortably an attractive FDI destination in the region.
“Malaysia still does not have the structural strength for the ringgit to appreciate against its Asean peers, ” he noted.
Lim forsees the local currency against the greenback to hover between RM3.80 and RM4.50 in the medium term.
“The best case scenario for the ringgit to appreciate will be RM3.80 to a dollar. I see no reason for the ringgit appreciating above the RM3.80 level against the US dollar. Until or unless, there is an economic restructuring of the country, the ringgit will not strengthen against its Asean peers, ” he said.
Last year, the ringgit staged a sharp recovery from its weakest level of RM4.45 per US dollar to end the year at RM4.02 mainly due to the weaker US dollar.
However, the local note had slipped further to RM4.06 against the dollar on Friday despite firmer crude oil prices.
UOB Malaysia senior economist Julia Goh said the weakening of the ringgit is due to the 10-year US Treasury yield steepening amid vaccine-driven reflation expectations.
This has spilled over into domestic bonds and interest rate swap markets.
As such, Goh noted that higher brent oil price has not lifted the ringgit due to external concerns on US yield movements that continues to price in higher inflation expectations.
“What this means is higher US yields is not good news for Asia emerging markets including Malaysia because it can potentially reverse inflows into these markets as the yield advantage of Asian currencies over the US dollar narrows.
“In short, near-term ringgit movements are likely to be driven by external factors particularly US fiscal and monetary policy developments, ” she said.
UOB Kay Hian Research is keeping its forecast of RM4 per dollar by June this year on the back higher oil prices and improving exports thanks to the ongoing global recovery.
“Strength of Asia recovery led by China is also positive for Asian currencies and ringgit. We are still keeping a view of stable ringgit on back of moderate US dollar weakness, further progress on vaccine rollouts and continued economic recovery, ” Goh added.
Given the anticipation of an election looming this year, MIDF Research economist Abdul Mui’zz Morhalim said the ringgit could have a boost should the new government be able to form a more “stable government”.
Meanwhile, he suggested that investors holding the US dollar could consider switching their holdings amid anticipation of US dollar weakening further.
“The US government is expected to provide additional fiscal stimulus, which could cause the US dollar to weaken against other currencies.
“In addition, improving appetite towards risky assets on the back of recovering economic activities will also cause the US dollar to weaken. On that note, investors may consider to switch their holding, ” Abdul Mui’zz advised.
With the expectation for the economic recovery to continue this year, he said the low-interest rate policy in the advanced markets would support the higher demand for emerging market currencies, including the ringgit.
“We forecast the ringgit to appreciate towards RM3.95 per US dollar by end-2021, ” Abdul Mui’zz said.
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