The local currency stood at RM4.1715 to the US dollar while the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) was at 1,549.05 when the new year’s first trading day (Jan 3) ended.
Even with the emergence of the war in Ukraine in late February, the ringgit and local bourse continued to thrive until the markets upended as US policy-tightening headlines propped the greenback.
The responses to the external shocks were broadly in line with the situation abroad, which saw capital flights occurring globally.
When inflation is catastrophic
The ringgit fell to a historic low of RM4.7465 against the US dollar on Nov 4 as inflation started to cut a swathe across the globe and at home.
This was its worst level since the currency recorded RM4.7125 on Jan 9, 1998, as a result of the Asian financial crisis. The pound, euro, and yen were among the major currencies also hitting fresh all-time lows.
The biggest currency market rout in years put pressure on central banks to hike rates as prices surged, including in Malaysia.
Bank Islam Malaysia Bhd chief economist Firdaos Rosli said aside from being hit by bets on further rate hikes by the US Federal Reserve (Fed) to tame inflation, the local note has been pressured by the widening interest rate differential between the federal funds rate (FFR) and Malaysia’s overnight policy rate (OPR).
The Fed has raised its policy rate by 425 basis points (bps) since March this year compared with a 100-bps increase in the OPR.
This scenario has resulted in the FFR range, now at 4.25-4.50%, being higher than the OPR at 2.75% thus far; and the Fed remains committed to reining in inflation, which has stayed elevated despite easing since July.
Firdaos said the reduced foreign portfolio investments into Malaysia of late have put the ringgit under pressure as well.
Foreign funds flows were negative from September to November in both the bond and equity markets.
He said although the foreign funds flow into equities for the first 11 months of 2022 was positive at RM5.68 billion, foreign investors sold their Malaysian bond holdings worth RM12.35 billion during the period.
“Currencies of emerging countries will continue to be under pressure as the Fed has yet to indicate its desire to pivot as long as US inflation continues to trend way above its 2% target rate,’’ he told Bernama.
Year-to-date, the ringgit has lost 6% of its value against the US dollar, while Bursa Malaysia was 4.8% down as of Dec 23.
Nevertheless, he reckoned the ringgit has recovered some losses since the second week of November. Hence, he said the local unit could end the year within the range of RM4.46-RM4.49 against the greenback.
Not all doom and gloom
Citing the ringgit’s performance as of Dec 19, Firdaos said that while the ringgit had depreciated against the Hong Kong dollar (-6.1%), Singapore dollar (-5.4%), and Thai baht (-1.4%), it had strengthened against other major currencies such as the euro (0.9%), Chinese yuan (3.4%), British pound (4.9%) and Japanese yen (11.9%).
“We see a similar trend with other currency pairs such as the Australian dollar (2.1%), Indonesian rupiah (3%), South Korean won (3.1%) and Indian rupee (4.4%),” he said.
Firdaos also said the weaker ringgit could be a catalyst for boosting Malaysia’s net export growth as import growth decelerates.
On a year-on-year basis, export growth caught up with import growth for the first time this year in November (both up by 15.6%), suggesting favourable trade balance growth in the immediate term.
He said this could lend support to the gross domestic product (GDP) for the fourth quarter of 2022 and, subsequently, full-year 2022, for which he forecast an 8.1% growth.
“We are pencilling in Malaysia’s GDP growth to come in at 4.5% in 2023, and 4.7% in 2024.
“Should the reopening of China’s economy intensify, it could give the necessary buffer for the positive outlook of the ringgit for end this year,’’ he noted.
Meanwhile, he reckoned that the FBM KLCI could end 2022 at around the 1,560 level.
The country also saw a smooth government transition led by 10th Prime Minister Anwar Ibrahim after the 15th general election.
The unity government, a broad coalition government consisting of various political parties, was formed as a result of a hung Parliament, a first in the country’s history.
In the long term, a coalition government could mean more consultative policies and more checks and balances, which would be “market positive”, he added.
2023 Outlook
Juwai IQI chief economist Shan Saeed projected that the ringgit will maintain its structural stability in 2023 as the US dollar goes into depreciation mode.
“The ringgit should be between RM4.10 and RM4.37 in 2023 based on the premise that higher oil prices, economic stability and, above all, depreciating US dollar come back into the market.
“We expect the local unit to be one of the top currencies, along with the Vietnamese dong, Indonesian rupiah, Thai baht, Brazilian real, South African rand, and Philippine peso in 2023 as the Fed commences quantitative easing (QE5) with lowering rates by October/November 2023 and the US economy goes into severe L-shaped deep recession,’’ Shan explained.
He said the ringgit had appreciated 8.14% in the last five weeks against the US dollar.
Meanwhile, CGS-CIMB Securities Sdn Bhd expected the FBM KLCI to gain 8% to end 2023 at 1,633 amid the potential return of foreign funds, merger and acquisition activities, and clarity on new government policies.