Ringgit up 5.3% year-to-date against dollar, among strongest performers in East Asia-Pacific

KUALA LUMPUR: The ringgit has appreciated 5.3% year-to-date against the US dollar, rebounding from its depreciation in 2023, making it one of the strongest-performing currencies in the East Asia-Pacific (EAP) region.

World Bank lead economist for Malaysia Apurva Sanghi said the ringgit’s appreciation began around July and has continued over the last three months.

“In our view, this strong performance is driven by three key factors. First, external factors, particularly monetary policy easing in the US and other advanced economies.

“Although the depreciation started earlier, markets are forward-looking, and this policy shift is a major external driver.

“Second, growth has exceeded expectations on the domestic front, especially with stronger-than-expected economic data in the second quarter.

“While Malaysia has seen high growth before, this time it’s reinforced by key reforms, such as the Fiscal Responsibility Act, the upcoming Tax Exemplary Statements, the Diesel Subsidy Rationalisation Programme, and the new Defined Contribution Scheme for civil servants. These initiatives have boosted investor confidence and increased demand for the ringgit,“ he told reporters at the October 2024 Malaysia Economic Monitor media briefing today.

Third, Apurva said, the government’s and Bank Negara Malaysia’s targeted initiatives, such as repatriating funds and improving the currency market, have further supported the ringgit.

“The market ultimately determines that based on various factors at any given time. While structural factors influence currency demand, it’s important to remember that currency movements, like price changes, have winners and losers.

“A stronger ringgit benefits importers by lowering import costs, but it also makes exports more expensive and less competitive globally,“ he said, adding that foreign and domestic investments have also shown positive returns to Malaysia.

Moving on, Apurva said certain factors could harm consumer confidence and pose potential risks to Malaysia’s economy.

“Malaysia’s main risk comes from external factors, particularly geopolitical issues.

“For example, the situation in the Middle East, while currently contained from an economic standpoint, could pose a risk if it impacts global commodity markets or dampens global investment sentiment. This, in turn, could negatively affect Malaysian consumption,“ he said.

Touching on Malaysia and China, Apurva said China is Malaysia’s largest trading partner, and the two economies are closely linked.

“In previous economic reports, we estimated that a one-percentage-point change in China’s growth could impact Malaysia’s growth by 0.4 percentage points.

“This is due to Malaysia’s significant exports to China, including commodities and manufacturing goods, as well as strong ties in tourism and services. The ringgit and yuan are also closely connected.

“A slowdown in China’s growth would naturally affect Malaysia’s economy and overall sentiment. However, despite China being Malaysia’s largest trading partner, the Malaysian economy is more sensitive to US economic changes than China’s,“ he said.

Elaborating, Apurva said a similar analysis of the US economy shows that a one-percentage-point change in US GDP impacts Malaysia’s growth by 0.8 percentage points—more than double the effect of China’s.

“The reason is that the US remains the world’s largest economy, about 25-30% larger than China’s. As an open, export-oriented economy, Malaysia is more affected by shifts in the US economy due to global economic linkages,“ he said.

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