KUALA LUMPUR – Putrajaya must undertake structural reforms and initiatives that would help keep the momentum on the ringgit’s improved performance, experts from CIMB said.
The ringgit’s value has been improving steadily over recent weeks, closing at 4.3310 against the US dollar at 5pm on Friday, August 6.
It is a vast improvement from February 20, when the national currency fell to RM4.7987 against the US dollar, the lowest ever recorded after the 1997 Asian financial crisis.
CIMB’s head of Treasury and Markets Research Department Michelle Chia and senior economist of Treasury and Markets Research Lim Yee Ping said structural reforms and initiatives that strengthen Malaysia’s macroeconomic fundamentals such as potential gross domestic product (GDP), current account and fiscal position, are key to safeguarding the ringgit’s resilience against global financial shocks.
“We think solutions should be addressed at fundamental issues including the reducing dependence on foreign labour, improving labour productivity as well as increasing the competitiveness of Malaysia’s goods and services exports,” they said in a joint statement to Scoop.
Both Chia and Lim also noted that Malaysia’s current account surplus has fallen from 10.4% of the national GDP in the 2005 – 2014 period, to 2.9% of GDP from 2015 to the first half of 2024.
“To improve external buffers, policies that make Malaysia the preferred investment destination amid global supply chain relocation, energy transition and digital transformation trends are crucial to transform the economy, enhance export competitiveness and raise the value-added output.
“To this end, the investment outlook has been bolstered by the implementation of various master plans, fast-track investments in strategic industries, as well as the RM120 billion commitment by key GLCs to driving domestic investments over the next five years via the GEAR-uP programme,” they said in a joint statement sent to Scoop.
GEAR-uP is a programme created by Putrajaya which aims at consolidating efforts across government-linked firms to catalyse growth in key economic sectors.
According to the Finance Ministry (MoF), the first phase of the GEAR-uP programme will see six leading government-linked investment companies (GLIC) collectively pledge to invest RM120 billion in domestic direct investments over the next five years, on top of RM440 billion in public market investments under their steady-state investment programmes.
These investments are primarily directed towards high-growth high-value (HGHV) industries such as the energy transition sector, advanced manufacturing especially in the semiconductor space, investments across all life cycles of firms from start-ups, venture capital to mid-tier companies and finally to support listing of such companies, according to the ministry.
Decline in US bond yield, expected policy rate cuts
Meanwhile, Chia and Lim credited failing US bond yields and expected policy rate cuts in the US Federal Reserve to improvements in the ringgit’s value as well.
The two factors have translated into diminishing preference for the greenback and foreign currency by investors, exporters, and households.
This has resulted in net inflows from non-resident portfolio investors and healthier two-way foreign exchange flows by resident portfolio investors.
“We see the ringgit strengthening to RM4.22 by end-2024, on the unwinding of those accumulated long US dollar positions,” added the experts.
Bond yields have been moving dramatically lower since late August, when the chairman of the US Federal Reserve, Jerome Powell said the first rate cut in four years was probably around the corner.
US-based financial information website Market Watch reportedly said that investors are expecting that the central bank would be lowering rates at its policy meeting on September 17 and 18.
Meanwhile, in Malaysia, Bank Negara Malaysia (BNM) recently maintained the overnight policy rate (OPR) at 3% last week.
Prime Minister Datuk Seri Anwar Ibrahim has credited the strong domestic economy and Putrajaya’s embrace of “unpopular” policies such as the targeted diesel subsidy scheme for boosting the ringgit’s value.
He also said that the ringgit’s performance has spurred confidence among investors, despite the gloomy outlook in the global geopolitical scene due to ongoing wars and concerns about impact on the stock market.
Chia and Lim added that a stronger ringgit can help with imported inflation and improve consumers’ purchasing power.
They cited the data provided by BNM, which showed that Malaysia’s share of imported content in private consumption declined from 31% in 2015 to 26% in 2020, and its analysis on exchange rate pass-through which indicated that a 5% change in ringgit-greenback value is associated with 0.2% change in headline inflation over the next quarter and 0.3% over a year.
Don’t restrict foreign workers’s remittance
Both Chia and Lim cautioned against implementing any policy that would restrict foreign workers’ remittance when asked if such a policy, as well limiting the number of migrant workers recruited, should be adopted to maintain the performance of ringgit value.
Malaysia currently has some five million foreign workers – three million Indonesians and two million Bangladeshis – sending money home each month. Available data online shows that migrant workers remitted RM40 billion overseas in 2018 alone.
Certain quarters have been reported saying that the high amount of remittances made by foreign workers have contributed to the weakening of the ringgit in the past, and have proposed imposing a limit on remittance sent by foreign workers to their families in home countries.
However, Chia and Lim said that proposals to cut remittances should be carefully evaluated as foreign workers remit a portion of their salaries to their home countries for the daily expenses of their family members and therefore should be given the flexibility on how to deploy their hard-earned money.
They instead suggested that the recruitment of foreign workers should be assessed based on the dynamics of the domestic labour market, such as labour shortages in sectors such as plantation and agriculture that could not be fulfilled by the local workforce.
The duo also pointed out that the ringgit weakened by 3.2% and 5.6% against the greenback in 2021 and 2022 respectively despite lower foreign workers’ remittances at 2.0% of the country’s gross domestic product (GDP) due to movement restrictions and economic activities disruption triggered by the Covid-19 pandemic.
“The deficit from foreign worker remittances has been hovering within a range of 1.9% to 2.5% of GDP since 2017, falling from an average of 2.9% of GDP in 2000 till 2016, suggesting it is less of a key contributing factor to ringgit fluctuations compared with the structural decline in other current account components and more volatile components such as portfolio flows,” they said.
Instead, Chia and Lim said that Malaysia should be focusing on reducing dependence on foreign labour, improving labour productivity as well as increasing the country’s goods and services exports. – September 8, 2024