PETALING JAYA: Bank Negara says the present weakness in the ringgit is primarily due to cyclical factors with the US Federal Reserve’s aggressive 525-basis-point rate hike over the 2022-23 period fuelling the rise in the greenback on strong demand.
It added geopolitical conflicts led investors to hold the US dollar as a safe-haven asset, while China’s weaker economic growth prospects also dampened investor sentiment in the region.
The central bank added Malaysia’s economic fundamentals, however, remain strong and the local unit is now undervalued against the US dollar.
In its “Economic and Monetary Review 2023” report, the bank noted it expects the pressure on the ringgit to abate in due course.
In the meantime, Bank Negara and the government have stepped up engagement with various investors and corporates including government-linked companies (GLCs) and government-linked investment companies (GLICs) to encourage repatriation and conversion of foreign investment income which translates into demand for the local unit.
“Bank Negara actively engages with resident exporters and monitors their conversion of export proceeds to ringgit, because conversion behaviour has an impact on the exchange rate.
“These actions are contributing to greater and sustained inflows, lending support to a firmer ringgit,” the central bank stated.
It also continues to advocate greater use of the local currency when settling export or import payments either via the Local Currency Settlement Framework or normal correspondent banking channels to reduce dependence on the US dollar.
There is much room to improve here. The bulk of trade, 82.1% in 2023, was settled in US dollars, including some 84% of intra-regional trade within Asean. Only 13.1% of trade within this region was settled in regional currency pairs.
Bank Negara’s engagements with major exporters found companies stated their preference to settle their trade in US dollars is to ensure that their US dollar income matches their exposure to US dollar-denominated external debt.
Multinational corporations with strong presence in the global supply chain, like those in the electrical and electronics industry, also commonly use the US dollar to implement a more centralised treasury management system to manage the flow of funds across countries.
Bank Negara noted the outlook for the ringgit is correlated to Putrajaya’s structural reform efforts to ensure fiscal sustainability, new growth areas and increased growth potential, as well as enhanced labour productivity and competitiveness.
The successful execution of reforms announced and proposed should bring in more investment flows into Malaysia, and thus provide more enduring support for the ringgit in the long run, the central bank added.
From an operational perspective, Bank Negara said its foreign-exchange operations provide necessary support to smoothen excessive volatility in the movements of the ringgit exchange rate.
“We did so by our presence in the foreign-exchange market to buy and sell ringgit when necessary. This ensures sufficient two-way liquidity in the ringgit exchange rate market.
“We continued to deepen the foreign-exchange market through ongoing efforts by Bank Negara’s Financial Markets Committee and banks operating in Malaysia, thus enabling businesses to meet their funding needs more effectively.
“We also continued to promote access to hedging instruments for businesses to better manage their foreign-exchange risks,” it stated in its annual report 2023.
