Friday 29 Mar 2024
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WHEN Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz was asked for a forecast for the ringgit at last week’s media briefing, she replied: “The forecast is volatility.”

The sharp depreciation of the local currency against the US dollar has been nerve-racking.

The ringgit’s sharp descent against the US dollar started last September, shedding 10.8% to end at 3.495 against the US dollar as at end-2014. Last week, the ringgit weakened further to 3.70, which is very close to 3.80, the level at which the ringgit was pegged to the US dollar during the Asian financial crisis in 1997.  

While Zeti expects the ringgit to stay volatile, she reiterated that the economic fundamentals remain intact, stressing that the central bank would not introduce capital controls and currency pegs.  

Zeti, who became governor in 2000, said the ringgit is undervalued and does not reflect the country’s economic fundamentals.

“At this stage, we would just say that it is significantly undervalued. We believe, given that we are one of the stronger growing economies in the region, and given our fundamentals of low unemployment level at less than 3%, strong banking system, high saving rates, surplus in the current account and high levels of reserves ... all these are important fundamentals that would support a stronger currency,” she says.

The latest Bank Negara annual report highlights that the strong fundamentals of the domestic economy and greater exchange rate flexibility, coupled with adequate international reserves and a strong banking system, have been key to the country’s resilience in periods of capital flow volatility.

“In times of great uncertainty, it generates capital outflows and the financial markets really thrive on volatility, so they look for opportunity to generate volatility. But the main thing for a country like Malaysia is that we have to strengthen our fundamentals in terms of being on a steady growth path. If we were on a weakened growth path or [have a] fragile economy, then these would really affect us badly,” said Zeti.

It is fair to say that the ringgit is not the only currency that has depreciated against the US dollar. Other currencies, including the yen and Australia dollar, have also weakened against the greenback as the recovery in the US economy gathers steam.

However, the ringgit is one of the worst-hit among the currencies of the economies in the region.  

When contacted, economists agree that negative perceptions have certainly played a role in the weakening of the ringgit but conclude that there are other more tangible factors like a narrower current account surplus and revised fiscal deficit target that could have been contributed to the decline.

The governor said there are many factors that have contributed to the depreciating ringgit, from the decline in crude oil prices to the different monetary policy changes occurring internationally that have cast uncertainties on the foreign front.    

She added that before the ringgit started to depreciate last September, it had strengthened significantly against the US dollar due to the surges in capital inflows from the excess liquidity in the market.  

“This (depreciating ringgit) is within our expectation because obviously, there will be unwinding of earlier surges of capital inflows because we have so much liquidity,” she said.  

CIMB economist Julia Goh expects the weakness in the ringgit to persist for the year because of the stronger US dollar moving forward. Meanwhile, RHB Research economist Peck Boon Soon opines that there are more downside risks in the near term.

“We expect the ringgit to stay weak and trade at 3.65 to 3.75 against the US dollar in the short term, but could worsen and trade towards 3.80 against the US dollar. This is on account of the large foreign holdings of financial assets in the country, while the US is expected to increase its interest rate in 2015, which could lead to capital outflow as expectation builds up,” he says in his report.

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This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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