The Malaysian ringgit is poised to extend its rally after what’s likely to be its best quarter since 1973, if the outlook for interest rates is any guide.
The ringgit has risen more than 12% against the dollar so far this quarter, making it the best performing emerging-market currency. Narrowing rate differentials with the US, improving trade performance and attractive asset valuations may help the ringgit strengthen further, analysts said.
Robust economic growth and a potential pickup in consumer prices if the government proceeds to remove some fuel subsidies may keep Bank Negara Malaysia on hold into 2025 even as other central banks start to lower borrowing costs. Foreign investor flows and further conversion of foreign currency deposits will also support the ringgit.
“Malaysia’s current account surplus, neutral central bank stance and stable fundamentals may help with further gains in light of dollar weakness,” said Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corp. “This is particularly so if markets expect more rate cuts by the US, reducing yield differentials between the US and Malaysia.”
The ringgit has been on a tear since April after a rebound in exports and efforts by the central bank to encourage state-linked firms to repatriate overseas investment income. The rally picked up steam this quarter as investors bet on Southeast Asian winners amid the prospect of policy easing by the Federal Reserve.
Global funds have poured a cumulative US$2.5 billion (RM10.52 billion) into the nation’s bonds in July and August, and bought US$1.2 billion of local equities since end-June, according to data compiled by Bloomberg.
The ringgit would also benefit from a rotation into Asia after foreign investors were overweight on Latin American currencies over the past year, according to Chandresh Jain, a strategist at BNP Paribas. “This flow should continue for some time,” he said.
Malaysia’s consumer prices rose 1.9% year-on-year in August, slightly below expectations, data on Monday showed. The ringgit was little changed against the greenback at 4.2055 per dollar on Monday.
Market indicators suggest the current surge in the ringgit may be stretched, signalling a potential consolidation in the near term. Traders will be keeping a close eye on the country’s budget announcement next month for its progress on subsidy reforms and fiscal deficit.
On a longer term basis, “there is no doubt that the ringgit valuation is attractive and cheap, based on effective exchange rate,” said Wee Khoon Chong, a strategist at Bank of New York Mellon.
Source : The Edge
BMI raises USD-MYR forecasts to 4.0 this year, 3.55 in 2025
BMI, a unit of the Fitch group, has revised its year-end forecast for the ringgit from 4.55 against the US dollar to 4.0, reflecting the local currency’s robust performance in the third quarter of 2024 (3Q2024).
“Over the medium term, we continue to hold a positive view on the ringgit, as narrowing yield differentials with the US and a relatively resilient growth outlook bode well for the currency,” the research firm said in a note on Friday.
However, risks to BMI’s forecasts are skewed towards a weaker ringgit, largely dependent on the US Federal Reserve’s (Fed) interest rate trajectory and mainland China’s growth.
Looking beyond the six-month horizon, BMI forecast the ringgit to strengthen by 9% next year, reaching 3.55 against the greenback by the end of 2025.
The house noted that the ringgit had reversed its broad weakening trend since the start of 2024, gaining 12.1% in 3Q2024, making it the best-performing emerging-market currency in the region.
“To account for the stronger-than-expected performance in 3Q2024, we have revised our forecast for the unit to average 4.35, from 4.55 previously.”
The research firm noted that the ringgit touched multi-year trendline resistance at 4.20 on Monday, and sees potential for it to reach 4.0 by the end of 2024, although short-term depreciation is possible due to an oversold relative strength index.
BMI said interest rate differentials between the US and Malaysia are expected to narrow in favour of the ringgit.
The Fed opted for a 50-basis-point (bps) cut this month, taking the funds rate down to 5.0%.
BMI now thinks the Fed will continue with a cutting cycle in the coming months, lowering its policy rate further by a further 75 bps in 4Q2024.
“The 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 3.0% through end-2024.”
Resilient short-term portfolio inflows are also supportive of the ringgit. Cumulative inflows have picked up sharply since July, particularly in debt, and are on track to record their best performance in five years, according to the house.
Beyond six months, BMI expects the ringgit to average 3.80, compared with 4.48 previously, in 2025.
“The primary driver will be further policy loosening worth 125 bps in 2025, which will take the Fed funds rate down to 3.0% by year end,” added BMI, which expects the Malaysian central bank to remain on hold at 3.0% through end-2025.
Malaysia’s relatively resilient real gross domestic product (GDP) outlook also supports the ringgit, the house added.
It expects real GDP growth to slow marginally from an anticipated 4.7% in 2024 to 4.6% in 2025. Meanwhile, it projected a more significant slowdown in US growth, lowering its forecast from 2.5% to 1.5% for the same period.
Meanwhile, BMI said the ringgit is likely to benefit from a sustained current account surplus, though it forecast a slight narrowing from 2.6% of GDP in 2024 to 2.4% in 2025.
It said resilient foreign direct investment (FDI) inflows will continue to support the local note. Malaysia has consistently attracted higher net FDI inflows as a share of GDP compared to regional peers like Thailand and Indonesia.
The Malaysian government’s recent announcement of a 0% tax rate for family offices in the planned financial zone of Forest City and reduced income tax rates for foreign workers are expected to boost FDI from 1Q2025.
In summary, the ringgit’s outlook remains strong due to narrowing yield differentials, resilient economic growth, and robust FDI inflows.
However, risks such as the Fed’s interest rate path and mainland China’s economic performance could influence this trajectory.
Source : The Edge
The World Bank estimates that we would be classified as a high income country if the ringgit hits RM4.00 and Malaysia’s growth continues to expand
THERE is “no reason” Malaysia cannot “break through the middle-income trap and become a high-income economy by the end of the decade”, says Asean+3 Macroeconomic Research Office (Amro) chief economist Khor Hoe Ee.
“We are optimistic that as long as [Malaysia] maintains fiscal and monetary discipline, new inflows of investment from abroad will be able to help [the country] raise the growth rate and reach the high-income level that they aspire to,” Khor told reporters on April 8 when releasing the Asean+3 Regional Economic Outlook (Areo) 2024 report.
The report itself does not elaborate on Amro’s assumptions on Malaysia attaining high-income status by 2030 but mentions this: “With the strong and stable growth in national incomes, all the region’s economies have transitioned to [at least] middle-income status, with China and Malaysia well positioned to reach high-income status by the end of this decade.”
China, which is currently closer to the high-income threshold than Malaysia, overtook Indonesia in 1998, the Philippines in 2003, Thailand in 2011 and Malaysia in 2020 in terms of gross national income (GNI) per capita, as calculated using the World Bank’s Atlas method to determine an economy’s income status (see Chart 1).
China had a GNI per capita of US$12,850 in calendar year 2022 while Malaysia had US$11,830, according to World Bank data.
Pending the annual recalibration on July 1 this year, lower middle-income economies are those with a GNI per capita of between US$1,136 and US$4,465; upper middle-income economies are those with a GNI per capita of between US$4,466 and US$13,845, while high-income economies are those with a GNI per capita of US$13,846 and above.
China, Malaysia, Thailand (US$7,230 GNI per capita) and Indonesia (US$4,580) are upper middle-income countries while Vietnam (US$4,010), the Philippines (US$3,950), Laos (US$2,310), Cambodia (US$1,690) and Myanmar (US$1,270) are lower middle-income countries. Vietnam overtook the Philippines in 2020.
Among the Asean+3 (Japan, South Korea, China) countries, Singapore, Japan, South Korea and Brunei (US$31,410 GNI per capita) have attained high-income status. Singapore overtook Japan in 2010 while South Korea overtook Malaysia in 1978 and surpassed the high-income threshold in 1993.
The ringgit factor
Amro’s projection on when Malaysia could attain high-income status is later than earlier projections by the World Bank.
In March 2021, economists at the World Bank said Malaysia was within “striking distance” of the coveted status and projected that the country “will exceed the threshold that defines high-income economy status at some point between 2024 and 2028”.
According to the 2021 World Bank report, Malaysia would cross the high-income country threshold by 2025 under a baseline scenario, which was premised on assumptions that Malaysia’s economy would continue to expand at around its potential growth rate, with the ringgit-US dollar exchange rate remaining unchanged at around RM4 per US dollar throughout the forecast period.
At the time, the World Bank said Malaysia could attain high-income status by 2024 under a high case scenario that assumed stronger profiles for gross domestic product growth and ringgit exchange rates; and by 2028 under a low case scenario that assumed the opposite. It is not immediately known what was the currency exchange rate assumed in the low case scenario.
The ringgit had averaged 4.0203 against the US dollar in 2020; 4.1665 in 2021, 4.4045 in 2022 and 4.594 in 2023, according to Bloomberg data.
Malaysia’s GNI per capita of US$11,830 in 2022 would have been US$12,961 or US$13,518 — much closer to the US$13,846 threshold for high-income status — if the ringgit had stayed at 4.0203 against the US dollar in 2020 instead of the weaker average exchange rates for 2022 and 2023, back-of-the-envelope calculations (using average exchange rates on Bloomberg) show.
To be fair, even though Malaysia has been an upper middle-income economy since 1992, the country has generally been able to reduce the gap between its GNI per capita and the high-income threshold since the turn of the millennium.
Since 2015, however, the ringgit’s exchange rate against the US dollar has weakened above the RM4 mark. This contributed to, but is not the only factor for, the gap between Malaysia’s GNI per capita and the high-income threshold widening year on year in 2015, 2016, 2017, 2020 and 2021 instead of closing as in 2018, 2019 and 2022. In 2022, for example, Malaysia managed to narrow the gap between its GNI per capita and the high-income threshold to only US$2,016 despite a stronger greenback (see Chart 2).
Still, Malaysia would have made more progress on the back of a stronger ringgit, given that GNI per capita used for the classification is denominated in US dollars.
Rising headwind, dissipating tailwind
Rather than its validation of China’s and Malaysia’s journey towards high-income status, the Amro report, which focuses on the Asean+3 region, acknowledged the region’s export boom from active participation in global value chains (GVCs), favourable domestic policies that attracted large foreign direct investments (FDIs) and brisk improvements in the quality of the labour force, alongside strong involvement in global and regional initiatives that signalled that the Asean+3 region was “open for business”.
Amro warned, though, that the “various tailwinds that facilitated the region’s remarkable growth are dissipating while the headwinds are rising”, noting that the speed of the region’s catch-up with high-income peers has been moderating since the 2008/2009 global financial crisis as global growth slowed on the back of a deceleration in working-age population growth, stalled momentum in GVC expansion, a slower pace of structural transformation for developing economies and slower economic growth in major advanced economies.
“More critically, the region is experiencing this slowdown in an environment increasingly beset by challenges from key secular trends, including population ageing, a global trade reconfiguration, and rapid technological change,” Amro economists wrote in the report, noting that economies “could be caught in a ‘middle-income trap’ if they do not rise above the challenge”.
An October 2023 survey by Amro on the region’s monetary and fiscal policymakers identified the ongoing reconfiguration in global trade and FDI as the most pressing risk to the long-term growth of Asean+3 economies, especially if it leads to a protracted global economic slowdown.
Meanwhile, rapid ageing is triggering fiscal concerns due to the potential rise in healthcare costs and pension liabilities, on top of the needed infrastructure spending that is required to sustain growth.
According to Amro, ageing is happening faster in the Asean+3 region than in other parts of the world, noting that Japan’s population peaked in 2010 while those of South Korea and China reached their peak in 2020 and 2021, respectively. Among the 10 Asean members, Thailand is projected to be the first to reach its population peak in 2029, followed by Singapore in 2041, Brunei in 2049, Vietnam in 2051, Myanmar in 2052, Indonesia in 2060, Malaysia in 2066, Cambodia in 2067, Laos in 2072 and the Philippines in 2092.
Still, the working-age population growth is projected to have peaked in Singapore in 2010, Thailand in 2012, Vietnam in 2013, Brunei in 2018 and Malaysia in 2022 while Myanmar’s is expected to peak in 2025 and Indonesia’s in 2029, according to data appended to the report.
Amro projects the region’s total working-age population to shrink in the second half of this decade, which carries negative implications for the region’s growth potential, macroeconomic stability and the sustainability of public finances. “However, these consequences are not predetermined and can be mitigated somewhat — especially if the population is allowed, and able, to age productively. When considering healthier life expectancies in the Asean+3 region, policies that support and promote healthy longevity could see about 200 million workers re-enter the region’s labour force by 2050,” Amro said, noting that investments need to be made to ensure a commensurate increase in total factor productivity.
Investments in automation and new technologies, such as robotics and artificial intelligence, for example, can help offset the negative impact of a shrinking workforce while augmenting the skills of older workers.
Several Asean+3 economies are “growing old before becoming rich” and could be entering their super-aged status with per capita incomes of less than US$10,000 — a situation that could contribute to the risk of falling into the middle-income trap problem, which many emerging and developing economies are worried about, Amro said, adding that some countries are approaching the ageing status with less than US$4,000 per capita incomes. Thailand, for example, became an aged society with a per capita income of US$6,000 in 2021 — an increase of US$2,000 from when it first became an ageing society in 2004.
Malaysia, which became an ageing nation in 2021 (7% population aged 65 and above) is projected to become an aged nation (14% aged 65 and above) by 2030. Though shy of the high-income threshold, Malaysia’s per capita income has been above US$10,000 since 2018.
Surpassing the high-income threshold is still important, symbolically, even though greater importance should be placed on sustainable reforms that will help a country defend the coveted status.
“Yes, it is more important to ensure sustainable growth at least at potential, if not above potential [and] you can say high-income status is no longer the [development] priority relative to closing the gap between the rich and the poor [under the Shared Prosperity Vision 2030] but will high-income status remain elusive to a country that has successfully industrialised and is indispensable to the global value chain?” an observer asks, noting that Malaysia “knows what it needs to do” to graduate to high-income status.
Source : The Edge
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