Of the two economists FMT Business spoke to, one expects it to strengthen against the US dollar in the second half of 2022 (H2 2022) while the other, although less bullish on the local note against the greenback, nonetheless sees it doing better than a basket of currencies of Malaysia’s trading partners.
Both expect the ringgit to trade between RM4.28 and RM4.50 towards the end of the year.
Bank Islam chief economist Afzanizam Abdul Rashid said Bank Negara Malaysia’s intervention and rising interest rates will see the ringgit reach a high of RM4.28 before the year is out.
“The country’s international reserves fell from US$116.1 billion on Jan 31 to US$109.2 billion on June 15 and this can be attributed to the central bank’s intervention in the foreign exchange market to help stabilise the local currency,” he said.
He pointed out that there is now a disparity of “negative real interest rate” of 0.8% between the overnight policy rate (OPR) of 2% and the current inflation rate of 2.8%.
“This will prompt Bank Negara to raise interest rates further but not anything as aggressive as what the US (is doing),” he added.
Afzanizam was referring to the decision by the US Federal Reserve to raise interest rates again by as much as 150 to 175 basis points, from 1.75% to almost 3.5% by the end of the year to mitigate its high inflation rate.
In May, the US reported that its inflation rate had hit 8.6%, the highest since 1981 when it peaked at 10.32%.
“It’s obvious that the US is looking to engineer a soft landing for its economy and with talks of more rate hikes, the demand for the currency will continue to rise for now,” he said.
However, Sunway University economics professor Yeah Kim Leng believes that despite US efforts, a hard landing is looming in the form of a recession, stoking fears of a possible stagflation.
“The US rate hike has helped to strengthen the greenback while other currencies, including the ringgit, are under pressure,” Yeah said.
He expects the ringgit to weaken to between RM4.40 and RM4.50 against the US dollar by year end.
But it is not all bad news. Yeah said that against a basket of currencies of Malaysia’s regional trading partners, the ringgit will likely hold its position or even strengthen slightly on the back of the current account surplus of 2% to 3% of GDP.
“This is likely to widen to 3% to 4% of GDP,” he said. Together with high commodity prices, it will help to bolster the local currency against (the currencies) of our trading partners,” he added.
Yeah said the possibility of China breaking out of its current Covid-19 lockdown soon would also help to bolster the ringgit. “China is Malaysia’s largest trading partner and once their economy gets back on track, it will help to increase our exports, thereby strengthening our currency,” he said.
He noted that the ringgit typically appreciates and depreciates in tandem with the renminbi.
Looking towards 2023, Yeah said that as long as Malaysia sustains its growth performance, it will see a stronger ringgit – on the premise that the US economy would likely have weakened due to the tightening of its monetary policy.
“Hopefully, the US does not enter into a recession, which is a baseline expectation, but regardless, this will see a stronger ringgit as the greenback reverses course on its previous gains,” he said.
Yeah expects the ringgit to return to the RM4.20 to RM4.30 range against the dollar premised on the US staying out of a recession.
“But if it does fall into a recession, expect the ringgit to move between RM3.90 and RM4.00 against the greenback,” he added.