Gaining ground in the region

THE ringgit’s recent strong rise against the US dollar has overshadowed the local note’s performance against regional currencies.

If one has visited a money changer recently while travelling abroad, then the fact that the ringgit has been able to purchase more of its neighbours’ currencies, especially since February, would not have escaped even the most mundane traveller.

Granted, the ringgit’s performance versus the greenback has been rather extraordinary this year from a Malaysian perspective, outdone only by its appreciation against the Japanese yen, Korean won and Indian rupee.

It has also strengthened measurably against the Singapore dollar, the Chinese yuan, the Hong Kong and Australian currencies as well as the Thai baht.

Economist and assistant research manager at IDEAS Malaysia Doris Liew observes that while the Singapore dollar has appreciated 3% and the Thai baht 6.3% against the US dollar respectively this year, the ringgit has outperformed by rallying 11.3% against the greenback.

She predicts the Malaysian currency’s strength to be sustained in the near term, with full-year gross domestic product (GDP) growth expected at 5% to 5.5%, coupled with the pickup in the semiconductor sector and consumer demand remaining strong.

“Budget 2025 will likely support continued growth, and while the US presidential election may introduce short-term volatility, it is unlikely to derail Malaysia’s long-term growth prospects,” she tells StarBiz 7.Economist Geoffrey Williams is quick to caution that a strengthened currency could be a mixed blessing, especially in an export-heavy country like Malaysia.While Malaysian’s exports, imports and total trade have been increasing generally, he points out that the trade surplus has been shrinking since August of last year.

“A stronger ringgit makes exports more expensive and less competitive, so it is a double-edged sword and should not be seen as a totem of strength,” he says.

He believes that a growing trade surplus is more important than an overly-strong ringgit because if the former continues to shrink, its contribution to GDP and economic growth declines.

He adds that an ideal and stable exchange rate based on long-term fundamentals would be RM4.20 to RM4.40 against the greenback.

He is forecasting the ringgit to stabilise in that range by the end of the year.

“With a stable exchange rate exporters have greater certainty and can make production and investment decisions with greater confidence.

“This supports sustainable long-term growth,” says Williams.

Furthermore, he says the current relative strength of the ringgit against its Asean peers, compared to a year ago, is due to domestic policies which put in effect the repatriation of profits from government-linked companies, a stable overnight policy rate with a clear monetary stance, and the economic policy reform agenda.

HSBC Asean economist Yun Liu agrees that while domestic policies have given the ringgit a shot in the arm, she is of the view that a stronger currency may not necessarily hurt Malaysian exports.

“It really boils down to the composition of goods that Malaysia exports, and the country actually has a well diversified economy.

“Taking the example of the technology upcycle, Malaysia is at a nascent stage of recovery, which is relatively more labour-intensive and at the lower end of manufacturing that is still fetching high global demand,” she observes in an interview with CNBC.

As the country is also a commodity exporter, she says its economic diversification is giving Malaysia a leg up among its neighbours, especially with regards to attracting foreign direct investments particularly from China.

According to Carmelo Ferlito, chief executive of the Centre for Market Education, the primary difference between the depreciated standing of the ringgit in February and its current level is expectations related to the US federal funds rate (FFR) cut.

This was in addition to a stable monetary policy by Bank Negara.

He says the FFR cut was bigger than expected and there are growing expectations that the US Federal Reserve will take this direction for quite some time.

Ferlito adds that the appreciation of the ringgit is linked to expectations rather than real economic factors.

“If we look at the Malaysian economy at the time of the ringgit’s depreciation in February and now, we can say that nothing substantially changed, economically, politically or in terms of policy.

“It is just about expectations on the rate differential, strengthened by the stability of Bank Negara’s policies,” he notes.

The results of the solidity procured by the central bank and the steady domestic political scene becomes more evident, says Ferlito, in the relationships between the ringgit and other Asean regional currencies.

Despite sharing Williams’ view that a stronger ringgit may mean that the trend of deteriorating exports in the balance of trade may continue, he is advocating for a stronger currency rather than re-widening the trade surplus.

Alluding to the fact that Malaysia is a net importer of essential products such as processed food, he says that as the ringgit continues its climb, such products will become relatively cheaper for Malaysians.

“A strong currency puts you in a better position to buy what you cannot produce. We should look more at comparative advantages rather than trade surplus per se,” he opines.

On that perspective, it is notable that IDEAS Malaysia’s Liew echoes the views of Ferlito and HSBC’s Liu, observing that export figures have remained robust despite the appreciating ringgit.

She asserts that while a weaker currency typically boosts export competitiveness, the long-term impact may not be as significant as initially anticipated.

“Given Malaysia’s strong economic fundamentals and previous currency devaluation, strengthening the ringgit should be seen as a market correction rather than an anomaly,” she points out.