Ringgit to return to fair value earlier than expected

KUALA LUMPUR: The ringgit is expected to return to its ‘fair value' in the second half of this year, much earlier than initially expected in the first half of 2018, according to Standard Chartered's (StanChart) latest Global Research report released yesterday.

The report showed that the ringgit remained highly attractive from a valuation standpoint.

“This is particularly relevant in an environment where investors, in their search for yield, are settling for assets with stretched foreign exchange (FX) valuations elsewhere in emerging markets,” it said.

StanChart justified that it had a short- and medium-term “overweight” FX weightings on the Malaysian currency.

It recently estimated the ringgit to trade at 4.20 against the US dollar in the third quarter this year and 4.10 at end-2018.

Despite the four per cent ringgit rally so far in the second quarter of this year, the currency's real effective exchange rate was only a touch above its all-time low including the Asian financial crisis, and it was also 11 per cent below its 10-year moving average, it said.

In addition, after almost US$40 billion of net portfolio outflows in the past four years, foreign positioning was very light by historical standards.

“Fundamental backdrop for the ringgit is arguably improving, (with the) firstquarter (Q1) gross domestic product (GDP) growth the highest in two years, coupled with net foreign direct investment inflows rising to the highest level since 1999,” StanChart added.

On the GDP growth, the report indicated that Malaysia's economy is expected to expand by 4.6 per cent this year, up from 4.2 per cent last year.

However, growth momentum is expected to slow in the coming quarters after peaking in Q1 as factors that drove growth, including resilient consumer spending, robust demand from China and strong investment, might taper off during the remainder of 2017.

Bank Negara Malaysia (BNM) was also expected to keep the policy rate unchanged at three per cent for the rest of 2017, the report said.

The tone of the May monetary policy statement remained neutral with the central bank continuing to view the current stance as accommodative and supportive of economic activity.

“We think that BNM will look beyond the temporary pick-up in cost-driven headline consumer price index inflation. The central bank expects only a mild pick-up in core inflation, a view that we concur with,” StanChart added. — Bernama