“Fundamental wise, we are not that bad, but there are certain elements of goodwill that we need. There are structural problems, the reform, fiscal deficit, debt level and current account,” says Socio-Economic Research Centre executive director Lee Heng Guie.
KUALA LUMPUR (Nov 16): An economist on Thursday urged the government to deliver on its promises of reforms that would eventually strengthen investors’ confidence in the country's prospects and potentially stem weakness in the local currency.
Socio-Economic Research Centre executive director Lee Heng Guie said that while the current weakness in the ringgit is mainly due to a strong US dollar and interest rate differential, capital flow data indicated that confidence also plays a role.
“With the widening gap between the US Treasury bonds and Malaysian Government Securities, investors will continue to take money out from here and put money in the US. The gap will continue to cause the capital outflow,” he said at the Deloitte TaxMax seminar on Budget 2024.
“The capital outflow has been very significant over the last 10 years. The last two years, we saw a surplus, but in the first half of this year, we continue to suffer a decline. Where did the outflow come from? It can be portfolio decline, lag of massive inflows of long-term capital, and some hidden outflow. A lot of investors or business people or individuals continue to put their money in the form of foreign currencies, in the banking system.
“Based on August data, the total amount of the foreign currency deposit — which can be in US dollars, renminbi, or in Japanese yen — was about 10% of the total banking deposit. In ringgit, it was about RM228.2 billion. And that number is much, much higher compared to pre-pandemic levels. So, it does tell you that there are some elements of confidence [in play],” said Lee.
With broad expectation that the ringgit would continue to weaken, Lee said exporters might not dare to convert their export proceeds into local currency even if they have repatriated these monies back into the country.
“The government has to continue to improve the country’s fundamentals, so that not only domestic investors will put their money here, but it will attract new foreign direct investment to come, and naturally it will support the ringgit over time,” he said.
“Fundamental wise, we are not that bad, but there are certain elements of goodwill that we need. There are structural problems, the reform, fiscal deficit, debt level and current account,” he added.
The ringgit is among the weakest-performing currencies in Asia amid the US’ rate hike and strengthening of the greenback.
Last month, the local currency weakened to near 4.8000 against the greenback, its weakest since the Asian Financial Crisis in 1997-98.