KUALA LUMPUR (Sept 29): The ringgit is on a weakening path in 2022, according to Fitch Solutions Country Risk & Industry Research.

In a note on Tuesday, Fitch Solutions retained its 2021 average exchange rate forecast at RM4.15 to the US dollar (USD), but revised its 2022 average forecast to RM4.20/USD from RM4.10/USD previously.

It said the short-term outlook for the ringgit remains weak due to the still-serious third wave of Covid-19 infections and the fiscal loosening that has and will continue to be undertaken to support the economy in light of the outbreak.

“Meanwhile, the long-term outlook for the ringgit has worsened with hawkish tilts in major central banks around the world, although any downside will be contained by undervaluation of real effective exchange rate (REER) terms and stronger economic activity amid shorter periods of containment measures being in place in 2022 versus 2021,” it said.

Fitch Solutions said since the last update in June 2021, the ringgit had weakened further, slipping by 0.3% against the US dollar to trade at RM4.18/USD as of Sept 24, from RM4.16/USD on June 23, bringing the year-to-date (YTD) average to RM4.13/USD.

“We maintain our forecast for the ringgit to average RM4.15/USD in 2021.

“In our view, the ringgit will continue to face depreciatory pressures over the rest of 2021 from the economic impact of the ongoing third wave of Covid-19 infections,” it said.

The research house said that a weak economic outlook due to pandemic challenges will continue to weigh on the ringgit over the coming months.

It said this is despite the government’s plan to reopen the economy fully and treat Covid-19 as endemic by the end of October 2021.

“We do not expect any such opening to be sustainable in the long term as evidenced by the experience of neighbouring Singapore, which has a higher vaccination rate and still struggled to sustain a reopening amid a resurgence in cases led by the Delta variant.

“Indeed, Malaysia is likely to be worse hit by a resurgence in infections once it reopens with cases still remaining well above 10,000 daily as of the time of writing on Sept 27, 2021,” it said.

Fitch Solutions said it had revised its 2022 average ringgit forecast to RM4.20/USD from RM4.10/USD previously.

It said over the longer term, the hawkish tilt of major global central banks, notably the US Federal Reserve (Fed), and Malaysia’s Covid-19 challenges will pressure the ringgit weaker.

“That said, the increased likelihood for the economy to remain open for the larger part of the year in 2022 compared to 2021, simply due to a much-higher vaccination rate, should limit selling pressure on the ringgit.

“Therefore, we expect the ringgit to trade with a slight bias to the weaker half of its long-term trading range of between RM3.80/USD and RM4.50/USD,”it said.

Fitch Solutions said that further ahead in 2023, it expects the pandemic to have been brought under better control, or that the economy would have worked out a better and more effective way to co-exist with Covid-19, such that it is able to further stabilise compared to 2021 and 2022, and "we forecast a slightly stronger average ringgit at RM4.15/USD".

Meanwhile, Fitch Solutions revised its 2021 fiscal deficit forecast for Malaysia to 7.4% of gross domestic product (GDP), wider against 6.4% previously, to account for weaker revenues and additional spending due to the third wave of Covid-19 infections still affecting the economy in the fourth quarter of 2021 (4Q21).

“Our view for the government to raise the debt limit has played out after the government took on significant debt to introduce RM205 billion in stimulus spending since the beginning of 2021 in order to cope with the lockdowns that it has imposed.

“Further stimulus spending in 2021 is unlikely in our view, and the capacity for more spending in 2022 to support any nascent recovery remains small,” it said.

Fitch Solutions said depressed revenues due to the lockdowns remain the key reason for the revision.

It said revenues contracted by 6.8% year-on-year (y-o-y) and 4.4% y-o-y in 1Q21 and 2Q21 respectively, and the outlook for revenue growth in 2021 was revised to -3% from 1% previously.

“We note that the poor results are despite the fact that Brent oil prices have been on a general uptrend since January.

“Indeed, Brent crude oil prices had risen from US$46.75/bbl at the beginning of 2021 to US$80.26/bbl as of Sept 28,” it said.

Fitch Solutions attributed the revenue weakness to the economy being subjected to lockdowns since January 2021, which severely affected economic activity, especially in the retail and services sector.

It said the situation could improve further in 4Q21, especially if the government pushes ahead with plans to fully reopen the economy by the end of October and treat Covid-19 as endemic.