‘RINGGIT CAN STRENGTHEN AGAINST U.S. DOLLAR’
Currency backed by strong macroeconomic fundamentals, says AmInvestment Bank
THE ringgit remains undervalued and there is room for the currency to appreciate further against the US dollar due to its strong macroeconomic fundamentals, said AmInvestment Bank.
“We project the ringgit to average around 4.33 against the US dollar, with our year-end target of 4.15 to 4.18 for this year,” it said. “We expect it to strengthen next year, averaging around 4.2499 with the year-end target at 3.95.”
AmInvestment Bank said the ringgit outlook was supported by Malaysia’s healthy level of foreign reserves, net inflow into equities, improving foreign shareholdings in government bonds, easy foreign currency deposits, stable growth and prudent monetary policy.
As at September 29, Malaysia’s reserves stood at US$101.2 billion (RM427.06 billion), equivalent to 7.6 months of retained imports and 1.1 times short-term external debt.
That is poised to improve on back of healthy exports, which is above the US$100 billion mark for the first time since mid-2015.
The cumulative net portfolio inflows in the equities market, meanwhile, was around RM10 billion year-to-date, following a sharp outflow from 2013 to last year, suggesting an appetite on the local bourse, said the research note.
Foreign holdings in Malaysian Government Securities improved steadily from a low of RM135.9 billion in March to RM156.7 billion last month, while foreign currency holdings as a percentage of deposits have eased from its peak of around eight per cent in January to around seven per cent in August.
Another positive factor was the country’s stable gross domestic product growth, with a betterthan-expected 5.6 per cent growth in the first quarter and 5.8 per cent in the second quarter, resulting in an upwards revision to 5.7 to 5.9 per cent growth for this year, said AmInvestment Bank.
It said while the ringgit had performed well this year, appreciating by 6.3 per cent against the US dollar year-to-date, the currency was trading below the parity line of the real effective exchange rate since December 2014, suggesting that it was in the undervalued region.
Other undervalued currencies include the rupiah (since October 2011), yen (since October 2012), Australian dollar (October 2014) and euro (May 2014).
AmInvestment Bank said with a firming US dollar/ringgit outlook, export-led industries that were competitive in the global market should experience challenges.
The impact on the industries will depend much on whether the drop in their export proceeds can be mitigated with cheaper costs of imported inputs due to the stronger ringgit.
“The ability to do so would mean that these industries could benefit from the natural hedge. But it may not be the case for exportdependent industries that are price-takers in the global markets, sourcing their inputs locally and paying in local currency.
“Such industries risk facing strong margin pressures. If the firms source their inputs from abroad and supply the final product locally, they will gain from a strong ringgit,” said the report.
AmInvestment Bank said while a stronger ringgit could result in some firms facing a decline in profitability, it also opened up other opportunities.
“Those adversely affected can undertake steps to hedge their foreign currency exposure and may need to re-strategise or even venture into other opportunities,” it said, adding that those benefiting from the stronger ringgit should not be complacent and should improve their operations to cope with the more challenging times when the situation reverses.