KUALA LUMPUR (July 2): BMI, a Fitch Solutions company, has retained its 2024 forecast that the Malaysian ringgit will appreciate later this year, rising from RM4.70/USD currently to RM4.55/USD by end-2024.

In a note on Monday, the firm said that over the medium term, it holds a positive view on the ringgit as narrowing interest rate differentials with the US and a relatively strong growth outlook should remain supportive of the currency.

“Risks to our forecasts are skewed towards a weaker ringgit and hinge largely on the US Federal Reserve’s interest rate trajectory and Mainland China’s recovery,” it said.

BMI said the ringgit has been on a broad weakening trend since the start of 2024 and touched the multi-year support of RM4.80/USD on April 16.

“While it has since regained some lost ground, the unit is down 2.5% against the US dollar year-to-date, ranking it among the better performing currencies in Asia.

“However, as the exchange rate has remained largely unchanged since our previous update in April, we retain our forecast to touch RM4.55/USD by end-2024 — implying that the ringgit will likely appreciate more substantially in 4Q2024,” it said.

BMI said it expects the spread between interest rate differentials between the US and Malaysia to remain stable.

“Indeed, the latest FOMC (Federal Open Market Committee) meeting had prompted us to revise our end-2024 Fed funds rate forecast from 4.75% to 5.00%, with the loosening cycle now due to kick off in September (previously July).

“This implies that narrowing yield differentials will be supportive of the ringgit, particularly if we are right in expecting Bank Negara Malaysia (BNM) to leave its overnight policy rate on hold at 3.00% through end-2024.

BMI said that looking beyond the six-month horizon, it expects the ringgit to strengthen by 3.3% next year, reaching RM4.40/USD by end-2025.

“Our forecast is slightly more optimistic than the Bloomberg consensus forecast of RM4.45/USD.

“The primary driver will be further policy loosening worth 200 basis points (150 bps in our April update), which will take the Fed funds rate down to 3.00% by December 2025. Meanwhile, we expect BNM to remain on hold at 3.00% through end-2025,” said BMI.

BMI said that as a share of gross domestic product, net foreign direct investment (FDI) inflows into Malaysia have consistently surpassed that of its regional peers, such as the Philippines and Thailand.

The firm highlighted that more recently in May, Prime Minister Datuk Seri Anwar Ibrahim was seeking to attract RM500 billion in investments in the initial phase of the National Semiconductor Strategy, particularly in the water fabrication and manufacturing equipment aspects.

“Additionally, at the 50th anniversary celebration of China-Malaysia diplomatic ties, Chinese Premier Li Qiang opened the possibility of connecting Malaysia’s East Coast Rail Link to other Chinese-backed railway initiatives in Laos and Thailand.

“While little has been finalised as of June, we expect Malaysia’s FDI to benefit from the improved regional connectivity should these plans come into fruition,” it said.