This article first appeared in The Edge Malaysia Weekly on October 24, 2022 - October 30, 2022

THE ringgit looks set to close at a new record low against the US dollar as The Edge went to print on Oct 21. The 4.7388 it was hovering at against the greenback was already weaker than its weakest close of 4.7125 on Jan 9, 1998, and a mere whisker from the all-time low of 4.885 that the currency pair had hit intraday on Jan 7, 1998.

Where the ringgit is now at has passed all 17 official forecasts of where the ringgit would end 2023 at, four of which were updated after parliament was dissolved on Oct 10, Bloomberg data shows.

However, venture online to web-based forecast sites that have found favour among phone chat groups, and predictions are for the ringgit to hit 5 to the US dollar by March, or as early as December this year. When these posts first made their rounds in May as the US Federal Open Market Committee (FOMC) made its first 50bps hike since 2000 — and before the Fed made three consecutive rate hikes of 75bps and looks set to make a fourth successive one come Nov 2 — predictions were for the ringgit to hit 4.8-levels around this time.

Malaysians will cast their ballots on Nov 19, a fortnight after Bank Negara Malaysia’s Monetary Policy Committee (MPC) has its last scheduled meeting for the year on Nov 3. The US FOMC has another meeting scheduled on Dec 14 after the one on Nov 2.

“Yes, Bank Negara Malaysia is independent [but] are the people who think there will be an OPR hike on Nov 3 ahead of the [general] election the majority or minority? We know a 50bps [OPR] hike is out of the question but [even with 50bps] we would still be trailing the Fed rate by a whole percentage point by year end. So will the ringgit hit RM5 [to the US dollar]? I don’t know. It won’t go back to 4.20 anytime soon,” a seasoned observer replies when asked to predict how much lower the ringgit would go.

Indeed, even before the expected 75bps hike, the US fed funds rate is already up 300bps since lift-off on March 16 to reach 3% and 3.25% on Sept 21. Bank Negara, meanwhile, had only normalised the OPR by 75bps between May and September to 2.5% currently — which is still 75bps below the 3.25% it was at in early 2019 before a 25bps cut was made in May 2019.

For sure, Malaysia needs fiscal reforms but the ringgit’s weakness has more to do with a strong US dollar environment that has been created as the Fed plays catch-up with runaway inflation and perpetuated by investors seeking solace in the greenback amid heightened volatility.

As the world awaits the Fed to complete this current cycle of tightening, a seasoned observer says one should pay heed to what Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus told participants at the recent Khazanah Megatrends Forum in Kuala Lumpur: “The Malaysian economy is not in a crisis.”

“The fundamentals of our economy and financial system are strong. And the pre-emptive policy measures taken will help us weather this storm. These are important facts on the economy and as Malaysians, it is important that we act in a manner that does not jeopardise the recovery and the confidence of investors, which in turn, can create a negative self-fulfilling cycle,” Nor Shamsiah said, noting that the ringgit remains “stable against major trading partners”.

Malaysia’s economy is set to grow above 6% for the first time in eight years — an enviable growth rate by any standard. Third quarter GDP figures to be released on Nov 11 is expected to be stronger than the 8.9% seen in the second quarter of this year. Full-year growth could be at the upper end of the revised forecast of 6.5% to 7%, with ample time to put in policies to shore up next year’s growth that is currently projected at 4% to 5%.

A potential boost for the country and the region is the strength of China’s reopening.

“A China reopening will help Asean decouple from a US recession. China is Asean’s largest market and accounts for 16.3% of Asean’s total exports. Asean exports to China stagnated this year. China accounted for 22% of Asean tourist arrivals pre-pandemic.

“Malaysia and Indonesia will be big winners across all four channels — exports, tourism, investments and energy,” economists at Maybank Investment Banking Group in Singapore led by Chua Hak Bin wrote in an Oct 21 note, adding that Malaysia “may benefit from the revival of Chinese Belt and Road investments”.

“As China accounted for nearly 20% of world oil imports in 2020-2021, a China reopening would also benefit energy exporters such as Indonesia and Malaysia but hurt energy importers, including the Philippines and Thailand, and to a lesser extent, Vietnam and Singapore,” they said.

The economists estimate that every percentage point increase in China’s growth will add a 0.5 percentage point growth to Malaysia’s headline GDP growth — that’s more than their estimated benefit of 0.3 percentage point for Indonesia and South Korea, in line with their estimate for Thailand but below the 0.6 percentage point boost for Singapore, Taiwan and Hong Kong.

“A revival in China import demand would help cushion the fall in Asean’s exports as the US and EU growth slows on aggressive Fed tightening and supply shocks from the Russia-Ukraine war. China is the largest export market for Indonesia (23.2% of total exports in 2021), Malaysia (15.5%) and Singapore (14.8%), and the second-largest export market after the US for Thailand (13.7%) and Vietnam (16.6%). Singapore, Vietnam and Malaysia will see the largest boost to their economies from a recovery in China import demand, with exports to China accounting for a substantial 17%, 15.3% and 12.4% of their GDPs respectively in 2021,” they added, noting that “Singapore (9.5% of GDP), Malaysia (8.3%) and Vietnam (7.1%) have the highest exposure to China”.

While the economists acknowledge that “any shift from zero-Covid will be slow and incremental” and that “it is unclear how strong Chinese consumers’ revenge spending will be”, China’s reopening is a question of when and how strong a recovery rather than an “if it happens”. That should be good news for the ringgit.

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