KUALA LUMPUR: The ringgit is expected to strengthen to about 3.80 against the US dollar in the fourth quarter this year, which is seven per cent stronger than its current level.
Affin Hwang Investment Bank Bhd head of research and chief economist Alan Tan Chew Leong said this would be fuelled by stronger commodity prices and normalisation of monetary policy in the second-half.
“We think the economic fundamentals will support the ringgit towards the end of 2018. While we think the currency will remain volatile in the short term, it will strengthen in the fourth quarter and rise towards the 3.80 level by end of this year,” Tan said at the Malaysia-China Chamber of Commerce’s briefing on business outlook post 14th general election on Saturday.
He added that Bank Negara Malaysia’s measures to stabilise the ringgit such as the conversion of 75 per cent of export proceeds held in a foreign currency into the local unit would help boost the currency’s value as well as fund flows into the country.
Affin Hwang’s 3.80 was similar to Prime Minister Tun Dr Mahathir Mohamad’s fair value assessment of the local unit, and the same as the peg he had set in 1998 during the Asian financial crisis.
At 6pm on Friday, the ringgit stood at 4.0600/0630 against the dollar from 4.0620/0650 on Thursday.
Affin Hwang also expects Malaysia’s fiscal deficit to narrow to between 2.8 per cent and 3.0 per cent of gross domestic product (GDP) this year from 3.0 per cent projected in 2017.
Tan said this would be supported by higher oil prices of around US$70 per barrel this year than US$52 previously.
On this year's inflation rate, Tan said it would strengthen to between 2.5 per cent and 3.0 per cent, compared to the official forecast of 2.0 per cent to 3.0 per cent.
Affin Hwang is more modest on the country’s GDP than Bank Negara Malaysia’s 5.5 per cent to 6.0 per cent forecast.
“We are projecting the real GDP growth of Malaysia at 5.3 per cent this year, compared to the official forecast of 5.5 per cent to 5.6 per cent (5.9 per cent in 2017).
“The risk is at an unexpected slowdown in the external environment,” Tan said, referring to the US-China trade war.
He, however, said it did not expect the US-China trade war to reach the full blown level, as both countries realised it would only hurt the global economy, which could trigger a catastrophic global economic downturn.
“I believe no one wants to see it happen,” he said, adding that the current situation shows the market is not giving a very negative reaction to the issue.
He expects the situation to be more of the tactical ploy by US President Donald Trump.
“But if it's out of control, it's possible to trigger the impact of 'full blown' and it will affect other world economies and Malaysia relies on external trade,” he added.
On the new government's economic approach, he said: “The new government understands why people vote for change. It understand the issues that the people are concerned about.”
He added that the fiscal reform initiative was in progress.