Asia’s emerging-market currencies are apparently proving attractive to investors willing to bet on local central banks keeping interest rates high amidst the fading strength of the US dollar.
Some analysts argue the ringgit does not hold much attraction for investors as Bank Negara Malaysia has kept its overnight policy rate (OPR) steady at 3% since July.
Brendan McKenna, an emerging market strategist at Wells Fargo & Co says the Indonesian rupiah, Philippine peso and Thai baht are among the best bets.
However, economists that FMT Business spoke to said while Asia’s emerging market currencies are proving attractive to investors, it will not have much bearing on the ringgit.
Bank Muamalat Malaysia Bhd chief economist Afzanizam Rashid said investors betting on emerging Asian currencies on regional rate hikes should not be a problem since the main issue now is the US’ interest rates.
“Judging from the latest US labour markets, the economy is showing signs of softening. The US unemployment rate has gone up to 3.9% in October after sustaining at 3.8% in the past two months.
“Therefore, talk of a possible interest rate cut in the US next year is gaining traction. This will support the value of the ringgit going forward,” he told FMT Business.
Afzanizam does not anticipate the ringgit being left behind as more funds flow into Malaysia’s Asean neighbours. Rather, it is the government’s implementation of growth narratives that will determine the direction of the ringgit in the longer term, he said.
He noted that the government has rolled out its National Energy Transition Roadmap, and the New Industrial Master Plan (NIMP) 2030, and tabled the Public Finance and Fiscal Responsibility Act, which aims to put government finances in order.
“So, if the government can show the positive outcome (of these initiatives), I think the money will flow in,” he said.
The ringgit has been Asia’s worst performing currency versus the US dollar this year after the Japanese yen.
OPR and ringgit weakness
Bait Al Amanah analyst Yugendran T Kannu Sivakumaran concurred that keeping the OPR steady may not significantly affect the ringgit.
He said the weakening of the ringgit can be attributed to certain countries, especially the US, raising their interest rates.
Additionally, he said, the country’s biggest trading partner, China, is experiencing economic challenges which has significantly affected the ringgit.
In 2022, trade with China accounted for 17.1% of Malaysia’s total trade. In the first seven months of 2023, trade between Malaysia and China dropped by 7.1%, equivalent to approximately RM17.97 billion.
Exports to our Asean partners have also declined by 6.1% between January and July.
“Even if we were to increase our OPR, it might not significantly strengthen the ringgit as the global economic challenges will continue to have a more substantial impact,” he told FMT Business.
Political instability
Yugendran said one reason foreign investors preferred to invest in other Asean countries in recent years is due to concerns about Malaysia’s political climate.
He said Malaysia has experienced political changes and instability in recent years and this has deterred foreign investment as “new leadership often brings new policies that can hinder investors”.
Additionally, he said, as Malaysia develops, some investors, especially in primary and secondary industries, may seek cheaper labour costs in countries like Thailand and Vietnam.
“This is especially true if their plans rely on a high demand for low-skilled labour,” he said.
However, he said the government’s economic initiatives including the Madani economic framework and NIMP 2030 are expected to boost the demand for the ringgit.
“As we progress towards becoming a high-skilled nation, we can attract new investors, especially in fields such as technology.
“We have already seen this with companies like Tesla expanding into Malaysia. So, I don’t think the ringgit will be left behind,” he added.