The Malaysian Ringgit (MYR) has been under considerable pressure, with no clear inflection point in sight. Despite some positive economic indicators, the currency's performance remains heavily influenced by external factors and market sentiments.
Bank Negara Malaysia (BNM) has been actively managing market volatility to ensure orderly conditions. As part of its ongoing efforts to reduce excessive market volatility and maintain orderly market conditions, Bank Negara will continue to maintain its participation in the foreign exchange market in order to offer liquidity. It is the intention of this proactive approach to reduce the influence that developments from the outside world have on the Ringgit.
Economic Fundamentals and External Influences
Malaysia's economic fundamentals remain strong, with the economy expected to grow between 4% to 5% in 2023. The country has maintained a current account surplus, equivalent to 3.3% of GDP in the second quarter of 2023 . However, the Ringgit's exchange rate does not fully reflect these robust fundamentals. The currency has depreciated by 4.9% year-to-date, influenced by aggressive policy rate hikes by other central banks and weaker-than-expected economic growth in China, one of Malaysia's largest trading partners.
Interest Rates and Inflation
The direction of the US Federal Reserve's interest rates significantly impacts the Ringgit. Economists predict that the Fed will cut its target rate six times by the end of 2024, which could help the Ringgit recover against the US dollar. However, the interest rate differential may still be unfavorable for the Ringgit. "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".
Structural Reforms and Future Prospects
Structural reforms underway in Malaysia are expected to enhance growth potential, attract investment, and support the Ringgit. BNM's international reserves, amounting to US$112.3 billion, are sufficient to finance 5.4 months of imports and meet international standards . These reserves provide a buffer against external shocks and support the currency's stability.
Challenges and Opportunities
Despite these positive aspects, the Ringgit faces several challenges. The global economic environment, particularly the performance of major economies like the US and China, will continue to influence the currency. Additionally, commodity price adjustments and the recovery of the tourism sector will play crucial roles in shaping the Ringgit's future.
While Malaysia's economic fundamentals are strong, the Ringgit's performance remains uncertain due to external factors and market sentiments. Continued efforts by BNM and the government to manage volatility and implement structural reforms will be crucial in navigating these challenges.
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