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The Ringgit in Fine Fettle … for Now, says UOB

[vc_row][vc_column width=”2/3″][vc_column_text](Above pic: L-R:  Julia Goh, Economist at UOB Malaysia and Suan Teck Kin, Head of Economics and Markets Research at UOB Group)

The United Overseas Bank (Malaysia) Bhd (UOB Malaysia) remains positive on the outlook for Malaysian Ringgit over the next six to 12 months, despite expectations of greater market volatility in the near term. The Bank expects the Ringgit to strengthen to 3.80 against the USD by year-end, supported by Malaysia’s strong economic fundamentals and the effective regulation of the onshore foreign exchange market.

According to Julia Goh, economist at UOB Malaysia, growing tension around the US trade tariffs may trigger renewed market volatility. The possibility of more rapid reduction of the US Federal Reserve’s balance sheet and a faster pace of interest rate rises in the US may also add further pressure to currency markets.

“The introduction of US trade tariffs and the possible proliferation of further protectionist trade policies could impact global export and trade activity. There is a risk that export-driven Asian economies could be negatively impacted by such trade policy revisions. While we do not expect global trade to fall significantly at this juncture, if global trade relations deteriorate dramatically, the result could be a stronger USD as investors move to safe haven assets. This may cause regional currencies to weaken against the USD in the near term,” Goh explains.

However, Goh expects the Ringgit to be less susceptible to sharp spikes in volatility compared with other regional currencies given it is supported by favourable domestic growth drivers.

“Should regional currencies weaken against the USD, we expect the Ringgit to experience some volatility in the near-term but to perform better overall compared with other Asian currencies. Supportive global growth conditions, higher domestic private consumption levels and private investment spending, and an orderly foreign exchange onshore market puts the Ringgit on a strong footing. As such, we maintain our projection for USD/MYR to strengthen further to 3.80 by year-end,” Goh said.

Favourable domestic growth drivers will lend support to the Ringgit

UOB Malaysia’s positive outlook for the Ringgit is driven by the country’s robust economic growth and still favourable global growth conditions.

“We expect the Ringgit to benefit from Malaysia’s steady flow of private sector investment and higher private consumer consumption levels. Improvements to the labour market, higher nominal income from previous years and rising affluence among Malaysians have helped strengthen private consumption levels in Malaysia. The country’s fiscal measures, such as personal tax cuts, cash aid and budget giveaways provide further support for consumer spending. In addition, continued global economic expansion will drive trade and investments, and provide overriding growth support for Malaysia,” said Goh.

The Bank’s outlook for a firmer Ringgit is also supported by Bank Negara Malaysia (BNM)’s initiative to promote the depth and liquidity of Malaysia’s onshore foreign exchange market. According to Suan Teck Kin, Head of Economics and Markets Research at UOB Group, BNM’s move to promote liquidity in the onshore foreign exchange market has made a positive difference.

“Since BNM announced new foreign exchange initiatives in December 2016, we have seen onshore forex conditions stabilise. Greater two-way flows of foreign currency demand and supply, lower average volatility for the Ringgit and transactions costs for businesses have eased. As a participating bank in BNM’s Appointed Overseas Office (AOO) framework, UOB Group and its subsidiaries across the region continue to support the Malaysian forex market by channelling forex transactions directly onshore,” Suan said.

 

[/vc_column_text][/vc_column][vc_column width=”1/3″][icon_counter border_size=”2″ border_color=”#a4a4a4″ icon_size=”32″ block_desc_front=”Behind all that “economic spiel”, EITN asked two pertinent questions that we all really want to know…
Q: How would the timing of GE14 affect Ringgit volatility?
A: Our basic assumption is for continuity in investor policy. We think domestically, there are fewer risks compared to external risks. In terms of Ringgit, more exporters coming in have actually converted their export earnings into Ringgit and that has actually boosted the demand for the Ringgit. We won’t play up the election factor. Nowadays, the impact of a general election is actually less compared to before, as evidenced all over the world. All these politicians ultimately want to get the economy going, even if there is a surprise change of government. They would not want to spook investors. Besides, people nowadays have great access to information and know what is going on and therefore, they are not easily scared. Ultimately, Ringgit volatility will be more affected by whether a trade war boils up between USA and China and the resultant fallout.

” block_desc_back=”Q: Do you see any impact of the new economy, the digital economy on our GDP and on the Ringgit, or is that still too small to assess?
A: Well, it is hard to quantify but from the qualitative perspective, you can see a lot of foreign direct investments (FDIs) coming in. In the medium term, it will increase productivity. The Malaysian government is trying to raise income and wages and one way to justify it is to raise productivity through digital innovation.
Digital economy, from our bank perspective, is a factor of concern. All the fintechs out there have impact on individual businesses. It definitely raises our productivity, make our transactions more efficient, with less steps involved. But it also comes with a negative impact. If you shop online, means you actually shop less in physical stores and we can see many store closures. So there is an impact…. with Alibaba doubling up their investment to US$4bil (via Lazada, based in Malaysia) on its online business, this will certainly have impact on the broader economy, so some restructuring will have to take place.

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