Credit Suisse: Room for ringgit to appreciate

Room for local currency to appreciate further, says research house

THE undervalued ringgit, strong export outlook and improving export growth are three factors that research house Credit Suisse feels are supporting its bullish view towards the local currency’s performance in coming months.

It said Bank Negara Malaysia had raised the stake for a nearterm interest rate hike.

The research house has raised its ringgit versus US dollar forecast to 4.0 in three months and 3.80 in 12 months, from 4.10 and 4.0, respectively.

“We see room for ringgit to appreciate further this year.”

As at 6pm on Thursday, the local currency ended 4.0875/0915 against the greenback from 4.0800/0830 on Wednesday.

Despite the recent ringgit rally, Credit Suisse estimated that the real effective exchange rate (REER) had risen only three per cent from its all-time low in December last year.

Relative to other commodity and oil currencies, the ringgit valuation gap is narrowing but still far from closing.

Export growth is likely to remain strong, raising Malaysia’s trade and current account surplus over the next year.

“Improving economic growth is likely to encourage a return of capital to what we believe is an under-owned equity market,” said the research house.

The consequence of “ringgit cheapness” has been a powerful recovery in Malaysia’s exports, particularly its non-oil exports and suppression of imports and led the exports to outperform most of the rest of the rest of Asia.

Major commitments by Broadcom and Western Digital for production and global distribution hubs in Malaysia are likely to boost export supply over the next year.

The recent rise in oil prices should also improve Malaysia’s oil and gas exports, albeit with a four to fivemonth lag, which implies mid-teens growth through the first quarter of next year.

“Malaysia’s current account surplus will widen to US$11.5 billion next year from US$9.9 billion this year, increasing it to three per cent of gross domestic product from 2.4 per cent last year.”

Credit Suisse expects Bank Negara to raise its policy rate by 25 basis points in the first quarter of next year.

On the US dollar, it said the passage of the US tax package is a near-term risk and could lead to a knee-jerk rise in the greenback.

“However, we do not think US dollar strength will be sustained, considering the still-weak US inflation, dovish Federal Reserve, and economic recovery elsewhere, including Malaysia.”

Domestically, a relaxation in the government’s restrictions on domestic fund outflows and the upcoming general election are the key risks to the research house’s forecast.

Malaysia’s current account surplus will widen to US$11.5 billion next year from US$9.9 billion this year, increasing it to three per cent of gross domestic product from 2.4 per cent last year. CREDIT SUISSE REPORT