PETALING JAYA: Malaysia is sitting on a record RM305.8bil pile of foreign currency deposits, raising the prospect of a sizeable future boost for the ringgit if more of these holdings are converted back into the local currency.
The April high came as Bank Negara Malaysia’s (BNM) international reserves edged closer to a 12-year peak, reinforcing signs of improving external strength.
Kenanga Research said the higher foreign currency deposits represent “substantial latent conversion potential” into ringgit over time.
Foreign currency deposits are bank deposits denominated and held in any currency other than the ringgit.
According to Mohd Harridon Mohamed Suffian, who is associate professor at the Universiti Kuala Lumpur Business School, the accumulated foreign currency deposits in Malaysia were partly due to exporters retaining part of their earnings in foreign currencies.
He told StarBiz that the buildup allows corporations to insulate their revenues against the fluctuations of designated currencies, with most companies having the propensity to hold their financial capitals in certain currencies in order to gain quick access to these denotations.
“A majority of companies would seek retention of offshore liquidity for certain financial reasons such as ease of payment for certain foreign goods or services and for repayment of debts,” he said.
A currency strategist with a foreign brokerage highlighted that corporates may be inclined to hold more foreign notes, especially the greenback for the immediate future, due to the fact that Malaysia has continued to benefit from exports in sectors such as electronics, commodities and services.
“Many companies remain comfortable holding the US dollar because US interest rates are still relatively high, making dollar deposits attractive.
“Geopolitical uncertainty and trade tensions encourage firms to maintain larger foreign-currency liquidity buffers.
“Some exporters may be delaying conversion into ringgit because the currency has already appreciated significantly from its 2024 lows and they are waiting for more favourable levels,” she said.
However, while concurring with Kenanga Research’s point that the record foreign deposit represents significant conversion potential back into the local note, the strategist argued that only a fraction of these balances is likely to be converted at any one time.
She said conversion would likely accelerate if the ringgit’s appreciation trend becomes more established and Malaysian bond yields remain attractive relative to developed markets, the country’s political and policy stability remain intact, and US interest rates begin falling.
“If those conditions emerge, exporters and corporates may decide that holding excess dollars no longer offers much advantage. The presence of these deposits therefore acts more as a potential tailwind than an immediate catalyst.
“It provides a reservoir of future demand for the ringgit rather than a guarantee of appreciation,” she added.
Economist Mohd Harridon agreed, explaining that the potential volume of exchange back to the ringgit depends upon the confidence of companies in the currency’s fluctuations.
While the ringgit had strengthened against the greenback and other currencies, he said previous patterns had shown that normalisation would occur, and there is always the possibility that the ringgit would depreciate against certain currencies.
Looking at the medium term towards the end of the year, Kenanga Research is holding to its year-end forecast for the ringgit of RM3.95 against the US dollar.
The research house said its “constructive” medium-term view on the ringgit is driven by expectations of a broader structural weakening in the greenback, supported by reserve diversification, portfolio reallocation and concerns over US fiscal sustainability.
While the broader view among economists seems to be rooting for domestic fundamentals to support the ringgit, the currency strategist speaking to StarBiz feels the biggest driver for the local currency is still likely to be the US dollar.
“Malaysia’s healthy current account, its contained inflation and BNM’s growing reserves are domestic tailwinds, but external risks are such that US rates remain elevated, and any escalation in Middle East tensions could increase demand for safe-haven US dollar assets.
“Foreign investors are also sensitive to domestic political developments,” she pointed.
“End-2026 projection for the ringgit is between 3.85 and 4.05 to a dollar.”
More importantly, executive director and seasoned economist at the Socio-Economic Research Centre Lee Heng Guie believes foreign currency deposits are expected to increase even further in the months ahead, in anticipation of higher US interest rates given the rise in inflation expectations.
“It must be noted that there are many passive foreign currency depositors and investors who hold money in foreign currencies for wealth preservation, portfolio diversification, or to hedge against local currency depreciation without actively trading in currencies.
“They rely on higher yield and steady appreciation rather than active speculation,” he told StarBiz.
Echoing the strategist’s views, Lee said while domestic economic fundamentals and long-term foreign investments remain supportive of the ringgit in the second half of financial year 2026.
However, the US Federal Reserve’s (Fed) future monetary path, interest rate differentials and volatile capital flows amid an uncertain global energy market affected by the ongoing Middle East conflict will remain the primary drivers of movements in the ringgit and the US dollar.
“Additionally, investors’ sentiment on the ringgit could be driven by the states’ elections and expectations of 16th General Election in the next six to 12 months.
“Our end-year target for the local note is RM3.95 to RM4.00 per dollar,” he said.
Separately, Finance Minister II Datuk Seri Amir Hamzah Azizan was quoted by Bloomberg as saying he is “not worried” by the recent slide of the ringgit since June, arguing that the fundamentals supporting the currency remain in place and that it will be “better than what it is showing today.”
At the time of writing, the local note was trading at RM4.08 to the US dollar and RM3.16 per Singapore dollar, having hovered around RM3.96 and RM3.10, respectively, against both currencies on June 1. Economists believe that Malaysia’s international reserves are likely to remain well supported through the rest of the year, underpinned by resilient domestic fundamentals and a relatively stable ringgit. It was reported that BNM had driven up its international reserves by US$900mil – or 0.7% month-on-month – to US$130.6bil as at the end of May, propelled by foreign currency reserves as well as a net short foreign exchange forward position.
