The central bank reaffirmed that it will “intervene” to stop excessive currency fluctuations.
PETALING JAYA: Bank Negara’s latest meeting on the ringgit’s depreciation was a disappointment, with no concrete monetary policy solutions offered even as the central bank labelled the depreciation as “excessive”.
While Bank Negara’s Financial Markets Committee (FMC) blamed the external environment as the main driver of the ringgit’s feebleness, it harbours hope that the ongoing measures of the Datuk Seri Anwar Ibrahim administration will support the ringgit.
The central bank, which sat on international reserves worth US$113bil (RM527bil) as at June 15, however, reaffirmed that it will “intervene” to stop excessive currency fluctuations.
The FMC’s latest statement seems to suggest that Bank Negara’s proverbial hands are tied, as interest rate hikes in major economies and outflow of funds from Malaysia are exerting pressure on the ringgit.
Since February, the ringgit has declined by 9.4% against the US dollar, 13.1% against the British pound and 10.6% against the euro. The ringgit also fell by 6.8% against the Singapore dollar in the same period.
The FMC said the ringgit, along with other regional currencies, has been weighed down by several global developments, including signs that China’s post-Covid economic recovery is losing its momentum.
“Against the backdrop of the US dollar strength, the FMC observed that the extent of the recent depreciation of the ringgit is not reflective of Malaysia’s economic fundamentals,” it said in a statement yesterday.
Established by Bank Negara in May 2016, the FMC comprises representatives from the central bank, financial institutions, corporations, financial service providers and other institutions which have prominent roles or participation in the financial markets.
The FMC opined that the recent movements in the ringgit’s exchange rate were excessive, considering several factors.
Firstly, Malaysia’s growth momentum is expected to continue in 2023 albeit at a more moderate level, supported by continued domestic investment activity, improving labour market conditions and higher tourism activities.
Malaysia’s broad and diversified economic structure will help cushion the impact of slowing global growth.
Secondly, while the strong correlation between the ringgit and Chinese yuan can be explained by the significant trading relationship between Malaysia and China, it is important to note that Malaysia’s external sector remains diversified, both in terms of product segments as well as in terms of trading partners.
The FMC observed that this should serve to moderate the close co-movement between the ringgit and the yuan.
Thirdly, the FMC noted that while the ringgit volatility has risen consistently with those of regional currencies’, the extent of the volatility increases has been disproportionately higher and deviating from historical relative movements.
“Notwithstanding this, the onshore financial markets remain on solid footing. Ringgit foreign exchange (forex) volatility remains the lowest among regional peers.
“This was underpinned by a healthy increase in daily forex turnover volumes over the past few years, averaging US$15.1bil year-to-date,” it said.
And fourthly, in the bond market, non-resident holdings of Malaysian Government Securities (MGS) bonds have remained close to the longer-term average figure of 23.5%.
“Importantly, MGS continues to offer positive real yield and FMC members noted sustained interest among foreign investors in the Malaysian bond market,” stated the FMC.
In order to allay concerns, the FMC said that further clarity on the US Fed’s terminal rate and possible positive signs from stimulus measures out of China may provide support to the ringgit and Asian currencies in general.
The committee also highlighted that recent forecasts by analysts and economists continue to point to broad-based recovery against the US dollar by year-end.
In their meeting yesterday, FMC members also discussed observations that corporates and exporters have retained more proceeds in foreign currencies, indicated by rising foreign currency account balances which could potentially lead to imbalance in market flows.
In managing their foreign exchange risks, the committee noted that corporates and exporters should be encouraged to take advantage of the attractive level of exchange rate in managing their foreign currency balances.
Adnan Zaylani, FMC chairman and Bank Negara assistant governor, pointed out that Malaysia’s expected economic growth in the range of 4% to 5%, as well as the structural reforms and fiscal consolidation efforts by the government, are supporting factors for the ringgit.
“As per its statutory mandate, Bank Negara will intervene in the foreign exchange market to stem currency movements that are deemed excessive.
“While the value of the ringgit will continue to remain market-determined, Bank Negara expects that ongoing measures by the government to further strengthen the economy will help to ensure that the ringgit better reflects the country’s fundamentals,” he added.
Meanwhile, Financial Markets Association of Malaysia president Chu Kok Wei welcomed Bank Negara’s guidance on the ringgit and recent market developments.
“We will remain supportive of its efforts in domestic markets.
“Financial markets in Malaysia continue to operate in an orderly manner and remain conducive to support our clients’ needs,” said Chu.
Speaking with StarBiz, Center for Market Education CEO Carmelo Ferlito said Bank Negara underestimates the domestic situation, adding that it is characterised by the lack of a comprehensive economic strategy.
“So far, it seems that the government navigates at sight, while neighbouring countries have clearer strategies.
“In particular, the government seems to fluctuate between a pro-market strategy and the urge to control with restrictive regulations on labour, finance and prices, among others,” he said.
Ferlito also claims that Bank Negara ignores the microfoundations behind the gross domestic product (GDP) growth
“A GDP which is mainly pushed by domestic consumption, with sluggish investments, declining as a percentage of GDP, is a symptom of an economy that is destroying wealth rather than producing it.
“In my opinion, GDP growth is not enough, it needs to be sustainable. And when it is driven by consumption and government spending, it is not,” he added.
Amid the public’s urge for Bank Negara to step in and tackle the ringgit’s decline, economist Geoffrey Williams of Malaysia University of Science and Technology begs to differ.
He believes that an intervention in the forex market is unnecessary at the moment.
“In line with its mandate, Bank Negara would only intervene in the forex market if volatility or continued weakness of the ringgit affected inflation, financial markets or growth.
“This is not the scenario that we are seeing in Malaysia.
“The concrete solution is for Bank Negara to follow its mandate according to conditions in Malaysia.
“Chasing the ringgit or following the Fed is not a concrete solution,” he said.
The Fed’s interest rate, known as the federal funds rate, has been raised aggressively since March 2022 from the range of 0%-0.25% to 5%-5.25% currently.
In contrast, Bank Negara had raised its overnight policy rate to 3% as compared to 1.75%, which remained from July 2020 to early March 2022.
