KUALA LUMPUR, Dec 26 — At the beginning of 2022, the outlook for both the ringgit and Bursa Malaysia looked promising as pandemic threats had shrunk.

The local currency stood at RM4.1715 to the US dollar while the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) was at 1,549.05 when the new year’s first trading day (Jan 3) ended.

Even with the emergence of the war in Ukraine in late February, the ringgit and local bourse continued to thrive until the markets upended as United States (US) policy-tightening headlines propped the greenback.

The responses to external shocks were broadly in line with the situation abroad, which saw capital flights occurring globally.

When inflation is catastrophic

The ringgit fell to a historic low of RM4.7465 against the US dollar on Nov 4, 2022, as inflation started to cut a swathe across the globe and at home.

This was its worst level since the currency recorded RM4.7125 on Jan 9, 1998, as a result of the Asian financial crisis. The pound, euro, and yen were among the major currencies also hitting fresh all-time lows.

The biggest currency market rout has put pressure on central banks to hike rates as prices surged, including in Malaysia.

Bank Islam Malaysia Bhd chief economist Firdaos Rosli said that aside from being hit by bets on further rate hikes by the US Federal Reserve (Fed) in its bid to tame inflation, the local note has been pressured by the widening interest rate differential between the Federal Funds Rate (FFR) and Overnight Policy Rate (OPR).

The Fed has raised its policy rate by 425 basis points (bps) since March this year compared with a 100-bps increase in the OPR.

This scenario has resulted in the FFR range, now at 4.25 - 4.50 per cent, being higher than the OPR at 2.75 per cent thus far; and the Fed remains committed to reining in inflation, which has stayed elevated despite easing since July 2022.

Firdaos said the reduced foreign portfolio investments into Malaysia of late have put the ringgit under pressure as well.

Foreign funds flows were negative from September to November 2022 in both the bond and equity markets.

He said although the foreign funds flow into equities for the first 11 months of 2022 was positive at RM5.68 billion, foreign investors sold their Malaysian bond holdings worth RM12.35 billion during the period.

“Currencies of emerging countries will continue to be under pressure as the Fed has yet to indicate its desire to pivot as long as US inflation continues to trend way above its 2.00 per cent target rate,” he told Bernama.

Year to date, the ringgit has lost 6.0 per cent of its value against the US dollar, while Bursa Malaysia was 4.8 per cent down as of Dec 23, 2022.

Nevertheless, he reckoned that the ringgit has recovered some losses since the second week of November 2022. Hence he said, the local unit could end the year within the range of RM4.46 - RM4.49 against the greenback.

Not all doom and gloom

Citing the ringgit’s performance as of Dec 19, Firdaos said that while the ringgit had depreciated against the Hong Kong dollar (-6.1 per cent), Singapore dollar (-5.4 per cent), and Thai baht (-1.4 per cent), it had strengthened against other major currencies such as the euro (0.9 per cent), Chinese yuan (3.4 per cent), British pound (4.9 per cent) and Japanese yen (11.9 per cent).

“We see a similar trend with other currency pairs such as the Australian dollar (2.1 per cent), Indonesian rupiah (3.0 per cent), South Korean won (3.1 per cent) and Indian rupee (4.4 per cent),” he said.

Firdaos also said that the weaker ringgit could be a catalyst for boosting Malaysia’s net export growth as import growth decelerates.

On a year-on-year basis, export growth caught up with import growth for the first time this year in November 2022 (both up by 15.6 per cent), suggesting favourable trade balance growth in the immediate term.

He said this could lend support to the Gross Domestic Product (GDP) for the fourth quarter of 2022 and, subsequently, full-year 2022, for which he forecast an 8.1 per cent growth.

“We are penciling in Malaysia’s GDP growth to come in at 4.5 per cent in 2023, and 4.7 per cent in 2024.

“Should the reopening of China’s economy intensify, it could give the necessary buffer for the positive outlook of the ringgit for the end of this year,” he noted.

Meanwhile, he reckoned that the FBM KLCI could end 2022 at around the 1,560 level.

The country also saw a smooth government transition led by 10th Prime Minister Datuk Seri Anwar Ibrahim after the 15th general election.

The unity government, a broad coalition government consisting of various political parties, was formed as a result of a hung Parliament, a first in the history of the country.

In the long term, a coalition government could mean more consultative policies and more checks and balances, which would be market positive, he added.

2023 outlook

Juwai IQI chief economist Shan Saeed projected that the ringgit will maintain its structural stability in 2023 as the US dollar goes into depreciation mode.

“The ringgit should be between RM4.10 and RM4.37 in 2023 based on the premise that higher oil prices, economic stability and, above all, depreciating US dollar come back into the market.

“We at Juwai IQI expect the local unit to be one of the top currencies, along with the Vietnamese dong, Indonesian rupiah, Thai baht, Brazilian real, South African rand, and Philippine peso in 2023 as the Fed commences quantitative easing (QE5) with lowering rates by October/November 2023 as the US economy goes into severe L-shaped deep recession,” Shan explained.

He said the ringgit has been appreciating 8.14 per cent in the last five weeks against the US dollar.

Meanwhile, CGS-CIMB Securities Sdn Bhd expected the FBM KLCI to gain eight per cent to end 2023 at 1,633 amid the potential return of foreign funds, merger and acquisition activities, and clarity on the new government policies. — Bernama