KUALA LUMPUR (March 20): The movement of the ringgit, which depreciated by 3.9% against the US dollar and by 3.7% against major trade partners in nominal effective terms, in recent times neither reflects the country’s economic fundamentals nor positive economic prospects, said Bank Negara Malaysia (BNM) in its Economic and Monetary Review 2023 report.

The central bank also cautioned that the road ahead may still be bumpy, despite expectations of easing pressure on the ringgit as the global monetary tightening cycle may have peaked. Besides, BNM pointed out that a prolonged weakening ringgit will be detrimental to the domestic economy.

“On and off, we may see changing and differing market expectations regarding the monetary policy trajectory of advanced economies. This, in turn, will affect the ringgit,” said BNM.

“That being so, we are mindful that a persistent and material undervaluation of the ringgit, if not addressed, could have permanent implications on the economy,” the central bank commented.

The ringgit, which was the second worst performing currency in 2023, experienced depreciation pressures mainly due to the aggressive monetary policy tightening in advanced economies, along with other regional currencies, said BNM. The depreciation was exacerbated further by the economic slowdown in China and geopolitical tensions in the Middle East.

While most advanced economies and some regional economies raised interest rates aggressively, BNM noted that Malaysia maintained a more gradual approach in raising the overnight policy rate given moderate domestic price and demand pressures amid early monetary policy recalibration.

In safeguarding the value of the ringgit, BNM reiterated its effort by actively engaging with government-linked companies and government-linked investment companies to encourage more consistent repatriation and conversion of their foreign investment income into ringgit.

Further, the central bank said it has stepped up its engagements with exporters and international investors to promote conversions and underscore Malaysia’s investment appeal.

BNM also continues to advocate greater use of local currency when settling export or import payments either via the Local Currency Settlement Framework or normal correspondent banking channels to reduce US dollar dependence.

“More broadly, BNM has also intensified engagements with various stakeholders — including business owners, financial market analysts and politicians — to further deepen our understanding of challenges faced in this environment, as well as to share BNM’s perspectives and responses to manage the pressures on the ringgit,” it added.

Don't miss the other highlights of the BNM Annual Report 2023. Read the articles here.