KUALA LUMPUR – Economic experts agree that alongside global factors, national policies are contributing to the Ringgit’s upward trajectory. However, they caution that the benefits of a stronger currency may come at a cost, particularly for Malaysia’s export-driven economy.
Economist Geoffrey Williams pointed out that Bank Negara Malaysia’s (BNM) decision to encourage local companies to repatriate funds from overseas has boosted demand for the Ringgit.
He added that the US Federal Reserve’s decision to pause interest rate hikes has also played a role in the Ringgit’s strengthening by reducing demand for US dollars.
Nevertheless, Williams emphasised that exchange rates are not necessarily a reflection of economic strength, warning that an appreciating ringgit could make Malaysian exports more expensive.
“Exports get more expensive and imports get cheaper. So there is a downside to stronger currency especially if it strengthens too much at a fast pace which doesn’t allow firms to adjust.
“The exchange rate is not a symbol of masculinity or strength, it is only a price,” Williams told Scoop.
Meanwhile, Global Asia Consulting senior consultant Samirul Ariff Othman posited that the strengthening ringgit could also be attributed to the fact that BNM has managed national inflation levels well and created environments to encourage foreign investments.
He added that strategic initiatives such as the National Energy Transition Roadmap have made Malaysia attractive to energy-demanding sectors such as data centres.
However, Samirul also said that global factors could not be overlooked.
“When the US Federal Reserve sneezes, emerging markets catch a cold, or in this case, warm-up.
“The relationship between the US Federal Reserve and emerging markets like Malaysia is, in many ways, a financial dance.
“When they raise rates, money flies back to the US, seeking the safer returns of US bonds.
“But when the US Federal Reserve hits the pause button, the dance floor opens up for countries like Malaysia, which offer more attractive yields, especially given their economic momentum,” Samirul said when contacted.
He said that while Malaysia’s relatively higher interest rates now appear more attractive for investment in local bonds and shares, such gains are only for the short term and could leave as quickly as they entered.
Instead, what Malaysia could benefit from would be long-term investments in physical assets or gross fixed capital formation (GFCF) such as industrial centres, infrastructure and machineries.
“GFCF is what builds the bones of an economy, generating jobs, industrial capacity, and sustainable growth.
“In contrast to the short-term investments, GFCF sticks around, providing the economic muscle that can carry Malaysia through good times and bad,” Samirul added.
Carmelo Ferlito, chief executive officer of the Centre for Market Education did agree that moves by the US Federal Reserve had an influence on the ringgit’s performance but stopped short of suggesting that national policies were a factor.
Instead, Ferlito highlighted that there were no substantial changes in Malaysia’s economy from the period of the strong currency depreciation in February to now.
What must be emphasised, Ferlito said, is that currency and stock exchange movements are actually driven more by sentiments and speculation rather than actual changes in economic variables.
“Previously, the recovery of the ringgit was caused by the expectation that the US Federal Reserve would cut interest rates.
“The strong performance (of the ringgit) now is caused by the expectation that US interest rate cuts would persist,” Ferlito said.
Additionally, although a rising ringgit would see Malaysian exports getting more expensive, Ferlito opined that the country’s core sectors such as palm oil, as well as oil and gas, would remain mostly unaffected.
As for Malaysians benefitting from cheaper imports, Ferlito explained that it would require the ringgit’s appreciation to last longer. – October 4, 2024