This article first appeared in The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

THE ringgit’s relative strength (or weakness) is among dominant topics this year, with the local currency weakening past the 3.50-mark against the Singapore dollar and threatening to breach the 4.80-mark against the US dollar in the last week of October.

“It was as if the ringgit had a Halloween special,” an observer quipped, noting how the ringgit had closed at its weakest of 4.7937 against the greenback on Oct 23 and 3.5022 against the Singapore dollar on Oct 24, about a week ahead of the spooky holiday in the Western world that falls on Oct 31.

At its weakest, the ringgit’s 8.14% decline year to date (YTD) against the greenback on Oct 23 made it among the worst-performing currencies in the region, ahead of only the Laotian kip even though all 10 Asean members saw their respective currencies weaken between 0.03% and 16.2% YTD back then.

This had improved as at Dec 21, with the ringgit closing at 4.6545 versus the US dollar, reflecting a 5.38% decline YTD, whereas the Laotian kip had weakened further (-15.85%). Asean’s two high-income countries, Singapore and Brunei, had the most gains against the US dollar at 0.93% at the time of writing, with the Cambodian riel, Indonesian rupiah and Philippine peso also showing positive gains versus the greenback YTD as at Dec 21, according to Bloomberg data.

Incidentally, the Singapore dollar closed at a new all-time high of 3.5273 against the ringgit on Dec 18. That may well be a boost for Malaysian tourism and consumption in light of the year-end school break. Whether there is also a net benefit for the country’s manpower and economy in the longer term remains to be seen, though some 300,000 Malaysians who travel across the Causeway to Singapore every day for work may well be more motivated and have more to spend in the Malaysian economy.

While it would be a challenge even for experts at the Department of Statistics Malaysia (DoSM) to determine the actual impact of a weaker ringgit on one’s purchasing power, given differences in the consumption pattern and that prices had also increased due to other factors, two key questions probably still play on the minds of many Malaysians:

First, could the ringgit skid further to hit RM5 to the US dollar next year? And, when will the ringgit strengthen to RM3.80 to the US dollar again?

The short answer to both questions is likely “no, at least not in 2024”.

The ringgit was last at RM3.80 to the US dollar more than eight years ago in August 2015. A lot has changed since then.

Among other things, Bank Negara Malaysia’s overnight policy rate (OPR) was at 3.25% in August 2015, while the US federal funds rate had been kept at 0% to 0.25% since December 2008 following the global financial crisis with a 25-basis-point hike only attempted in December 2015 to lift rates to 0.25% to 0.5%. The yield differential was hugely in Malaysia’s favour, compared with a negative since the US Federal Reserve began aggressively hiking rates in March 2022 (see Chart 1).

Incidentally, it was also around mid-2015 that The Wall Street Journal published its exposé on the RM2.6 billion money traced to 1Malaysia Development Bnd (1MDB) and found in former prime minister Datuk Seri Najib Razak’s personal bank account.

Direct federal government debt had also increased 83% over eight years from RM630.5 billion, or 54.4% of gross domestic product (GDP), as at end-2015 to RM1.16 trillion or 62.5% of GDP as at September 2023. Debt directly guaranteed by the federal government had also increased from RM177.7 billion or 15.3% of GDP to RM318.7 billion or 17.2% of GDP over the same period.

Just as the ringgit’s weakness the past two years had much to do with the US Fed’s aggressive monetary policy tightening — which saw the fed funds rate (upper limit) rise a whopping 550bps from 0% to 5.5% in merely 17 months between March 2022 and July 2023 — and China’s underwhelming economic recovery post-Covid-19 reopening, experts say the ringgit’s performance in 2024 would depend on how fast and how much the US Fed cuts rates next year and whether China’s growth could surprise on the upside to bolster regional trade.

In its October update of the World Economic Outlook report, the International Monetary Fund — which expects global growth to slow to 2.9% in 2024 from 3% in 2023 — sees China’s gross domestic product growth slowing to 4.2% in 2024 from 5% this year and the US economy expanding slower at 1.5% in 2024 from 2.1% in 2023.

That, of course, was before US Fed chair Jerome Powell announced a surprise dovish pivot after maintaining rates for a third time at 5.25% to 5.5% at its Dec 13 meeting. While Powell did not take rate hikes off the table, he did say further hikes were “not likely” and that the Fed’s policy rate is “at or near its peak”. Markets are reworking bets and economists their forecasts after the Fed’s so-called dot plot pencilled in three rate cuts in 2024, possibly four more cuts in 2025 and three cuts in 2026.

OCBC Bank FX strategist Christopher Wong expects the ringgit’s performance to improve in 2024, but only modestly.

“We expect the Fed to cut rates by 100bps in 2024 and start cutting rates in 2Q2024. The narrowing of yield differentials can help USD-MYR to trade lower [allowing] the ringgit to strengthen, but RM3.80 to RM4 [versus the greenback] is not our baseline,” he says.

“Our baseline is for the ringgit to recover some lost ground on the back of expectations of a softer US dollar and US Treasury yields as the US Federal Reserve embarks on a rate cut cycle in 2024,” he adds, noting that China’s stabilisation story should also benefit Malaysia inbound tourism and trade. “Domestic fundamentals remain largely sound, supported by medium-term government plans and fiscal consolidation.”

Expecting the US Fed to begin cutting rates in the second quarter of 2024 and by a total of 100bps, Wong sees the ringgit ending 2024 at 4.58 to the US dollar, and strengthening only to 4.50 against the greenback by end-2025.

According to Bloomberg data, OCBC sees the ringgit improving to 4.40 to the US dollar in 2026, to RM4.62 by March next year and to RM4.60 by June next year before hovering at around RM4.58 in the second half of 2024.

OCBC’s Wong also expects the Singapore dollar to remain strong versus the ringgit, commanding RM3.4697 for every Singapore dollar by end-2024 and RM3.4351 for every Singapore dollar by end-2025.

“For the ringgit to strengthen more than our forecasts, a few things need to happen. First, the Fed [needs] to cut more and earlier than expected. Two, China’s stabilisation [has] to translate to sharper economic recovery, leading to inflow of funds to China and the region. Three, global growth momentum [needs] to pick up, benefiting Malaysian exports and growth. If these factors play out, there is a chance that the ringgit may strengthen against trade partners, given its relative high sensitivity to external factors, including China,” Wong surmised.

Standard Chartered Bank Asean and South Asia chief economist Edward Lee says the ringgit, which “underperformed in 2023” owing to two key macro surprises — the resilience of the US economy and the much weaker-than-expected return of China post-Covid — “may outperform next year if [his] base case of a weaker US dollar and stable China materialises”.

“Never say never, but it appears now that the Fed’s pivot is more concrete, especially with the December FOMC [Federal Open Market Committee] meeting outcome.

“In addition, if commodity prices recover, especially in CPO and natural gas, and if capital outflow stabilises [especially on the errors and omissions], there may be a stronger impetus to convert US-dollar holdings to ringgit. A sharper drop in the US dollar, precipitated by more-than-expected Fed rate cuts, will be very helpful as that will enhance the improvement in monetary policy divergence with Bank Negara more likely to hold rates versus regional central banks. Moreover, foreign bond holdings of ringgit bonds are relatively low and have room to recover if the interest rate differentials improve,” says Lee, who also expects the US Fed to begin cutting rates in the second half of 2024, but only by 50bps.

Both OCBC’s and StanChart’s expectations of US Fed rate cuts are below what the market has pencilled in.

According to Bloomberg data as at Dec 20, the market expects at least two cuts to happen by May 2024 and a third cut to happen by June, to bring the fed funds rate closer to 4.6%. At the time of writing, the market has also pencilled in a fifth rate cut by the third quarter and a sixth rate cut by December next year to bring the fed funds rate below 4% from 5.5% (upper bound) now (see Charts 2 and 3).

“So, a more probable risk is market expectation for rate cuts being dialled back for any better US data performance. We expect China’s economy to remain soft. Having said that, since the July politburo meeting, China authorities have been progressively introducing supportive measures. This should help to stabilise growth, albeit potentially remaining lacklustre,” says Lee, referring to the six 25bps rate cuts priced in by markets in 2024.

StanChart’s forecast for the ringgit to end-2024 at 4.40 to the US dollar, however, is among the most bullish of forecasts available on Bloomberg, which ranged between CIMB Bank’s RM4.38 and BNP Paribas’ RM4.62, with the median forecast at RM4.45, slightly better than the average of RM4.47 at the time of writing.

“Our current view for the ringgit to recover in 2024 is driven predominantly by expected Fed rate cuts in 2024, while Bank Negara is more likely to hold rates rather than cut. While the interest rate differentials may remain unfavourable against the ringgit, the relative change in direction should help the ringgit to recover against the US dollar. A more stable China and renminbi will also mean less of a drag on the ringgit.

“Onshore US dollar deposits remain at a historic high as a percentage of total banking deposits and a turn in the US dollar may drive some unwinding. In addition, commodity price adjustments have been significant in 2023 and prices appear more stable now, while continued tourism recovery should help with net services balance,” Lee says.

At the time of writing, most economists polled on Bloomberg expect Bank Negara to retain its OPR at 3% in 2024. Even if the US Fed does cut its target rate six times to around 3.8% by end-2024, it would still be above the OPR.

Asked about the ringgit’s performance, a seasoned observer says the ringgit “should not slip to RM5 next year”, given the US Fed’s bearish pivot. Whether the ringgit can strengthen above 4.40 to the US dollar, however, remains to be seen.

The observer continues, “Much needs to be done by the central government. Right now, we are still waiting for the real difference to show in the numbers, without which the point of reference would be RM5 and not RM3.80.” 

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