The ringgit’s poor performance in recent years against the US dollar, resulting from the Federal
Reserve’s constant interest rate uptick to control runaway inflation has the market concerned
about Malaysia’s domestic monetary policies.
Are the policies targeted enough to allay fears that the Malaysian currency will not spiral out of
control?
In a recent report, the country’s central bank, Bank Negara Malaysia (BNM), said that the
country’s economy is driven mainly by domestic elements and not by external headwinds.
The central bank seems to be taking a myopic view of the impending US tariffs on key trading
partners that will come into effect just days away on April 2.
The tariffs are expected to cause a major tectonic shift in the global economy, affecting
Malaysia’s trading partners, among others and their ability to purchase local goods and services.
Insisting that these factors are not worrying, BNM remains confident in Malaysia’s economic
resilience, with the central bank projecting a GDP growth rate of between 4.5 % and 5.5 % for
2025.
It said in its Annual Report it is focussing policy initiatives towards domestic reforms, advocating
financial market developments and policies that strengthen productivity and competitiveness.
International Reserves?
One of the most popular and effective tools used by nations to stabilise currencies is to use its
international reserves to combat long-term pressures on the domestic currency’s exchange rate.
However, BNM seems reluctant to use its reserves to shore up and maintain some modicum of
stability in the ringgit is worrying.
Last week, a Bloomberg report said that BNM was one of three central banks facing a “cash
crunch” because of efforts to combat the strength of the US dollar.
If cash is a problem, then it explains why Malaysia’s central bank is concentrating on
domestic policies to prop up the economy.
But leakages inflated prices due to corruption are hard to stamp out in the short term.
One analyst cited in the Bloomberg report indicated that BNM has used its currency forwards to
help support the ringgit which has increased its net short position in the forward market.
To make matters worse, Malaysia has high loan-to-deposit ratios, resulting in the tightening of
interbank liquidity.
This has a knock-on effect on local demand and supply as borrowing becomes expensive, and this
puts a damper on demand, both domestically and in international markets.
The ringgit is maintaining a six-month average of 4.41 to the US dollar, though it did hit a high
of 4.12 against the dollar last October.
The central bank is hoping that the structural reforms, including the New Industrial Master Plan
2030 and the National Energy Transition Roadmap will kick in to jolt Malaysia’s economic
resilience and, logically, the ringgit’s strength and stability.
BNM has insisted that reserve interventions are suited to handling short-term volatility. But many
feel that the ringgit’s poor performance for a long time is a reflection of bad fundamentals and a
lack sufficient reserves to intervene in the forex markets.
It seems a very long shot if the domestic reforms to support ringgit are enough to prevent the
currency from falling further into new lows.
The bottom line is that there are serious doubts about the country’s international reserves and the
ringgit’s future prospects.