Economists: Ringgit may weaken further in Q3

KUALA LUMPUR: The ringgit may weaken further against the US dollar to as steep as 4.7500 by the third quarter of 2023, bogged down by higher global interest rates, a risk-off environment and sluggish growth in China, economists warn.

They said the lack of a clear and comprehensive economic strategy from the government would likely further weaken the local currency.

The ringgit is approaching historic lows at the moment after a recent gain following Bank Negara Malaysia's decision to raise its overnight policy rate (OPR) on May 3.

The move initially helped the ringgit gain 0.3 per cent against the dollar, but the positive effect was shortlived as two weeks later, it lost more than one per cent and hit a six-month low of 4.6280 in early trade last Friday.

Centre for Market Education chief executive officer Dr Carmelo Ferlito said the recent OPR hike by Bank Negara was mainly to rein in inflationary concerns, while the behaviour of the local currency was a multi-faceted issue stemming from multiple factors.

"We can expect the ringgit to remain weak mainly because of two factors. One is the lack of a clear and comprehensive economic strategy domestically. It seems that the government is mainly navigating at sight and a strong economic leadership is missing.

"Externally, China is the main trading partner of Malaysia and the recent bad news from China is indeed a source of concern for Malaysia. The weakness of China particularly, which had to be expected because of the suicidal lockdown policies, will negatively weigh on the ringgit," Ferlito said.

Bank Muamalat Malaysia Bhd chief economist and head of social finance Mohd Afzanizam Abdul Rashid said historically, the ringgit's volatility had always been contributed by external factors.

He pointed out that the depreciation of ringgit last year was triggered by the sharp increase in the US Federal Reserve's fund rate and eventually became less of an issue when the Fed slowed down its pace on interest rates hike in December.

The Fed shifted the pace from 75 basis points to 50 bps and currently, it stood at 25 bps since February this year.

"However, issues surrounding the US debt limit have started to receive greater attention in the past one month when market participants started to pay attention to the debt ceiling expiry which now has been extended from June 1 to June 5.

"Fitch Rating has issued a warning by revising its rating outlook to negative last week. This would mean rating downgrade for the US government is quite likely should the decision to raise the debt limit is not resolved," Afzanizam said.

He added that during heightened economic uncertainties, demand for the safe haven currencies would become prevalent as market participants were seeking shelter against volatility.

"By extension, the ringgit would weaken during such time. In that sense, given the possible speed bumps in respect to global growth this year, we shall expect the ringgit to remain weak in the near term," he added.

Universiti Teknologi MARA faculty of business and management senior lecturer Dr Mohamad Idham Md Razak said an expected prolonged ringgit fall was looming due to a number of factors. This included issues faced by the Malaysian economy such as slowdown in growth, rising inflation and a growing current account deficit that could increase ringgit susceptibility to depreciation.

"The ringgit is losing ground to the US dollar relative to a range of other currencies. The ongoing conflict in Ukraine and the Federal Reserve's hawkish stance on monetary policy are two reasons for this.

"There is a significant stochastic probability that the ringgit-dollar pair will drop to 4.75. This indicates that the likelihood is very high. Overall, the data point to a continued decline in the ringgit to dollar exchange rate," he said.

Mohamad Idham added that with China being one of the country's main trading partners, a slowdown in the former's economy could potentially result in a decrease in demand for Malaysian goods.

"This can result in a drop in Malaysia's profits from foreign exchange and a weakening of the ringgit."

He added that the government could intervene in the foreign exchange market or continue raising interest rates to stabilise the local currency.

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