30th May 2022 - 3 min read
Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz has reassured the public that the ringgit’s current depreciation is caused only by temporary factors. It is expected to be strengthened eventually by Malaysia’s strong economic fundamentals and prudent management of the currency.
According to the minister, one of these temporary factors is the international community’s expectations for the global monetary situation. There has been a continued tightening of global liquidity, which in effect, has caused investors to begin speculating and taking precautions. “As a result, they have reallocated funds to higher-yielding assets denominated in US dollars. This has led to the depreciation of various global currencies, including the ringgit,” he explained.
The ringgit is also affected by expectations that China’s growth prospects will deteriorate this year, due to the republic’s strict implementation of movement restrictions in major cities, stemming from a zero-Covid policy. This is as China is a major consumer of Malaysian goods and services; exports to China accounts for a significant 10.7% of Malaysia’s gross domestic product (GDP), in comparison to other countries, such as Indonesia (2.1%) and Thailand (1.3%).
Additionally, volatile global geopolitical tensions have impacted global economies, which indirectly led to the weakening of several currencies as well. “This is reflected in the value of the VIX, or the investor ‘fear index’, which has increased to 25.7 points (as of 28 May) from the previous average of 18 points. This has also caused investors to flock to safe-haven assets – such as gold and the US dollar – putting downward pressure on various currencies, including the ringgit,” Tengku Zafrul further elaborated.
Despite all the pressures mentioned above, however, Tengku Zafrul is confident that the ringgit’s value will remain stable, and then recover in the near future. This is as Bank Negara Malaysia (BNM) actively manages the local currency to ensure that the local note’s fluctuation does not overwhelm the local economic sector.
“What is more important are our economy’s strong fundamentals, such as the country’s continued economic growth prospects. The ringgit will continue to strengthen after the economy expanded by 3.6% in the fourth quarter of 2021 and 5% in the first quarter of 2022,” said Tengku Zafrul, adding that this recovery is also reflected in the most recent analysis by the International Monetary Fund (IMF).
For context, the IMF projected a 5.75% GDP growth for Malaysia in 2022, propelled by both domestic demand and strong external demand.
Finally, Tengku Zafrul also said that the demand for ringgit will continue to remain strong, given expectations of a current account surplus.
To note, the Malaysian ringgit hit an all-time low against the Singapore dollar last week, weakening past 3.20 for the first time. On 19 May, the local currency also weakened past 4.4 against the US dollar for the first time since the onset of the pandemic.
(Source: The Edge Markets)
Subscribe to our exclusive weekly newsletter and we’ll bring you the week’s highlights of financial news, expert tips, guides, and the latest credit card and e-wallet deals.
Stay tuned for what’s to come next in the personal finance world