KUALA LUMPUR (April 23): The Ministry of Finance (MoF), noting that the ringgit's depreciation has tracked the general weakening of major and regional currencies, said it expects Malaysia’s strong external position and robust fundamentals to cushion further ringgit decline.

In a statement on Saturday (April 23), the ministry said geopolitical uncertainties had put downward pressure on the country’s recent recovery from the impact of the Covid-19 pandemic.

In light of this, despite the US Federal Reserve (Fed) signalling an impending aggressive tightening of its monetary policy, investors' expectations for US inflation had risen to their highest level in decades, the MoF added.

As a result, there was a historic bond sell-off in major markets around the world, the ministry said, adding that such a move came in response from the indication of a more aggressive Fed monetary tightening to combat inflation, which is currently at its highest level in 40 years in the US.

“Due to Malaysia’s open economy and market-determined exchange rate, fluctuations in the ringgit are influenced by both global and domestic factors. Changes in investor sentiment, the path of pandemic recovery and policy normalisation in advanced economies are among them.

“The ringgit's depreciation has tracked the general weakening of major and regional currencies. The prospect of a more aggressive monetary tightening by the Fed, with a 50-basis point rate hike expected in May, as well as overall weakening of currencies in the region are some of the factors that have influenced the recent movement in the ringgit,” said the MoF.

This, the ministry noted, is especially true for the weakening of the yuan, which is positively correlated to the ringgit, as China remains one of Malaysia's most important trading partners.

“Furthermore, the ringgit, like other Asian currencies, has been influenced by the Fed's global liquidity withdrawal.

“Regardless, it is worth noting that activity in the ringgit market remains robust. Year to date, the average daily onshore foreign exchange trading volume is US$12.6 billion (about RM54.5 billion), compared with US$11.3 billion in 2021, with 3.9% average volatility (2021 average: 4.6%),” said the MoF.

It added that the flexibility of the ringgit will continue to benefit the Malaysian economy by facilitating appropriate external sector adjustments and cushioning the domestic economy from adverse global shocks.

“Malaysia's strong external position, which includes a healthy current account surplus and a net external creditor position, has significantly improved the country's ability to withstand such volatility and external shocks.

“Furthermore, Malaysia's fundamentals remain robust as indicated by its consistent export growth and competitiveness, ample foreign reserves, as well as a low inflation trajectory in comparison to peers within the region.

“All these are expected to cushion further ringgit decline,” the ministry said.

The ringgit closed at the 4.30 level against the US dollar on Friday, a level last seen in June 2020. Year to date, the local currency has depreciated 2.75% against the greenback.

In terms of inflation, the MoF noted that the International Monetary Fund's (IMF) most recent projections are a 5.7% increase in advanced economies, and 8.7% in emerging market and developing economies. These are 1.8 and 2.8 percentage points higher than the projections made in January 2022.

For Malaysia, the ministry said the price control policies imposed by the government, as well as subsidies allocated for the RON95 petroleum and various food items will protect the people from any implications of further inflationary pressures.

“Malaysia’s inflation rate this year is expected to be 2.2% to 3.2% (2021: 2.5%), lower than other countries within ASEAN,” the MoF added.

It cited IMF data, which showed that Malaysia’s expected inflation rate in 2022 is 3%. This compares with 4.3% for the Philippines, 3.8% for Vietnam, 3.5% for Thailand and Singapore, and 3.3% for Indonesia.

“This is further supported by the Department of Statistics Malaysia’s recent announcement of the March 2022 inflation rate, which remained as per the February rate at 2.2%,” said the MoF.

Moving forward, the ministry stated that it will along with Bank Negara Malaysia (BNM) continue to monitor both financial and non-financial risks towards the economy.

“These include recent geopolitical tensions, as well as how they will affect global supply chains which may lead to higher inflationary pressures and increased volatility in Malaysia’s foreign exchange and financial markets.

“BNM will also contribute to the smooth operation of the domestic foreign exchange market by always ensuring adequate liquidity to ensure that businesses will be able to plan and execute both trade and investment transactions with greater certainty,” said the MoF.