BANK Negara Malaysia Governor Datuk Muhammad Ibrahim rightly and understandably pointed out that adjustments to the ringgit should be viewed from a long-term perspective.

“In the short term, exchange rate movements could react to new headlines and market sentiments, instead of reflecting the underlying strength of the economy. What is important, therefore, is to ensure the availability of ample reserves, maintaining strong economic fundamentals and managing our exposure to external debt,” the governor said in a speech last Monday at the Malaysian Institute of Economic Research (MIER) anniversary dinner.

“While financial markets can be capricious, as market players focus on short-term developments,” and policymakers need to “look beyond these noises”, Muhammad says.

“As we continue to address our vulnerabilities and improve domestic fundamentals, the ringgit will eventually reflect the strength of our economy.”

To be sure, Bank Negara’s reserves — US$97.7 billion (RM392.5 billion) as at mid-September —  are at their highest since June 2015, when they slipped below the psychological US$100 billion mark for the first time since September 2010, and remain ample at 1.2 times external debt and 8.1 times retained imports. Reserves are also up nearly 5% from their recent low of US$93.3 billion in September last year.

Foreigners (non-residents) continue to show interest in Malaysia, holding 49.8% of total outstanding Malaysian Government Securities in 2Q2016, up from 48.7% in 1Q2016. And 96.2% of RM655.7 billion outstanding federal government debt is ringgit-denominated.

Yet, debt needs to be repaid. At RM655.7 billion as at end-June, federal government debt has grown 37.6% over four years. During this period, debt guaranteed by the federal government expanded by easily one-third to RM178 million as at end-March. Transferring items off balance sheet helped to keep government debt below the self-imposed 55% ceiling but debt service charges had already doubled in eight years to RM26.6 billion in 2016, to swallow more than 10% of the annual national budget operating expense.

Given the global mobility of capital — both money and talent — noises that affect sentiment can have long-term impact on confidence, investments and a currency’s strength.

“While the woes of the ringgit may thus be largely attributed to external factors, domestic factors have also weighed ominously on currency sentiments. The most unflattering of all is arguably the multibillion ringgit 1MDB [1Malaysia Development Bhd] fiasco, especially the default dispute of 1MDB with an investment fund in Abu Dhabi and the US Department of Justice’s actions against the alleged money laundering of 1MDB funds.

“What is most damaging are the aspersions that such investigations have cast on the integrity of several important institutions in the country, suggesting that good governance may have been brazenly compromised, pointing to a severe lack of checks and balances. To all these one may add ‘noises’ in the market that do not bode well for the currency,” says Prof Emeritus Datuk Mohamed Ariff, Professor of Economics and Governance at the International Centre for Education in Islamic Finance and MIER distinguished fellow.

Mohamed Ariff agrees, though, that the ringgit “will strengthen when oil prices recover and the 1MDB dust settles”.

“Much will also hinge on sound macroeconomic fundamentals,” he adds.

RHB Research Institute executive chairman and chief economist Lim Chee Sing reckons that the recent weakness in the ringgit vis-à-vis the US dollar “is not just driven by sentiment, but reflects largely some fundamental weakness of the economy”.

“Political issues aside, real gross domestic product (GDP) growth for the Malaysian economy weakened for the fifth consecutive quarter to 4% year on year (y-o-y) in 2Q, from +4.2% in 1Q, and this was accompanied with a sharp drop in the current account surplus in the balance of payments to RM1.9 billion or 0.7% of GDP in 2Q, from RM5 billion or 1.7% of GDP in 1Q. This reignited fears of a risk of the country’s current account falling into a deficit in the coming quarters.

“In addition, the fiscal deficit rose significantly to 5.6% of GDP in 1H2016 on the back of a 9.8% y-o-y fall in government revenue and a 5.7% increase in government expenditure (+2.1% operating expenditure, +31% gross development expenditure). This was significantly above the government’s full-year target of a fiscal deficit of 3.1% of GDP. The concern over the possibility of a twin deficit emerging, coupled with the risk of the government not meeting its fiscal deficit target, do not inspire confidence.

“Over and above that, oil prices have been volatile. The Brent crude oil price, for instance, has fallen to the mid-US$40 per barrel level (until last week) after having recovered and surpassed the US$50 per barrel level in recent months. Sentiment for the ringgit was affected as Malaysia is the only net oil and gas exporter in the Asean region. Meanwhile, the local bourse remains unexciting to foreign portfolio investors given its premium valuations and the absence of earnings growth to improve its outlook. This led to some foreign selling on the local bourse from time to time that continues to pose a drag on the ringgit. All these domestic factors, coupled with re-pricing of US rate hike expectations from time to time, caused the ringgit to weaken and stay weak, in my view,” Lim says.

UOB Malaysia economist Julia Goh also sees legitimate concerns in the market: “Even though Malaysia has a diversified export base, the oil factor remains a significant driver for the ringgit, as we have seen in recent weeks. I think there are legitimate concerns that global growth is weak and there is less confidence in the efficacy of global central bank policies. As such we have seen risk appetite wane and emerging market currencies, including the ringgit, weaken against the US dollar.”

Considering the fast-paced changes taking place globally, concern over the underlying strength of the economy in the longer term is not without cause. While Malaysia has successfully reduced its dependence on oil and commodities, it is still striving to attain that breakthrough that would catapult the country into that true coveted developed nation status that only real, thorough and continuous advancements can bring with progressive policymakers and a well-educated skilled talent pool, experts say.

On a brighter note, RHB’s Lim is not all bearish and sees the ringgit “eventually” strengthening beyond that psychological RM4 mark to the greenback.

“I believe the ringgit has overshot on the downside,” he says. While the ringgit may still be volatile in the near term, he reckons that “headwinds are no longer strong”, with the US unlikely to be aggressive on rate hikes, there being some stability in oil prices and no aggressive Chinese renminbi devaluation.

“With a clearer political landscape over time, and once these headwinds subside more significantly, I believe the ringgit will likely be biased towards strengthening as long as the country does not fall into a twin deficit situation. This is despite expectation of a relatively stable US dollar as the risk premium accorded to the ringgit will likely narrow over time. My own thinking is that the ringgit will eventually strengthen to below the RM4/USD level,” Lim says.

UOB’s Goh draws optimism from the fact that “even under a new normal of slower growth, Asia remains the centre of growth and will continue to chart higher growth rates than most other parts of the world”.

“Pressure points will come as we approach key risk events like US Federal Reserve meetings and the presidential election. On the domestic front would be the release of the third-quarter GDP and current account data, which would shape views on the direction of Malaysia’s interest rates,” says Goh, who is keeping her 2016 GDP projection of 4.2%, which is within the government’s projection of 4% to 4.5%.

To meet Goh’s projection, the economy needs to grow at least 4.3% on average in 3Q2016 and 4Q2016 — above the 4.2% in 1Q2016 and 4% in 2Q2016. She expects “a slight uptick in the second half of the year, premised on sustained expansion in services, manufacturing, mining, construction and narrower contraction in agriculture amid recovery in CPO (crude palm oil) production”.

She concedes that there are downside risks to growth but she is keeping her forecast on the government’s stimulus measures and lower interest rates. “Goods and Services Tax effects are abating and the upcoming budget should provide some measures for the lower and middle-income groups,” Goh adds.

Stronger economic growth would aid sentiment and possibly the ringgit.

As it is, the ringgit might not see RM4 to the US dollar until 2018 or 2019, according to median and mean figures collated by Bloomberg at the time of writing. Forward rates are also not looking up yet, being 4.15 to the greenback for 4Q2016, 4.21 in 2017, 4.28 in 2018, 4.37 in 2019 and 4.50 in 2020.

What is certain is that the elephant in the room will not solve itself. Here, drawing wisdom from the central bank’s words is perhaps apt: “In facing a world of paradoxes, perhaps we too need to take full advantage of the strong foundations and conventions that were built in the past, yet remain sufficiently nimble and unafraid to rethink and reconstruct in facing the uncertain future. Errors will be inevitable, but the more important point is our ability to correct them and to remain committed to achieving the right outcomes.”

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