UOB Malaysia retains positive outlook on ringgit
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. Julia Goh, UOB Malaysia economist
KUCHING: 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 US dollar by year- end, supported by Malaysia’s strong economic fundamentals and the effective regulation of the onshore foreign exchange market.
According to UOB Malaysia economist Julia Goh, growing tension around 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 exportdriven 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 US dollar as investors move to safe haven assets. This may cause regional currencies to weaken against the US dollar in the near term,” Goh said.
However, Goh expects the Malaysian 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 US dollar, 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 US dollar-ringgit to strengthen further to 3.80 by yearend,” Goh said.
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,” Goh said.
The bank’s outlook for a firmer ringgit is also supported by Bank Negara Malaysia’s ( BNM) 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 foreign exchange conditions stabilise. Greater two way flows of foreign currency demand and supply, lower average volatility for the ringgit and transaction 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 foreign exchange market by channelling foreign exchange transactions directly onshore,” Suan said.
UOB Group supports and promotes the settlement of trade and investments onshore through its 18 AOO centres across the region. It serves a broad range of clients including financial institutions, non-bank financial institutions, sovereign wealth funds and corporates.
The group also supports regional cross- country currency settlements and promotes the wider use of local currencies to facilitate and boost trade and investments into the Asean region, including Malaysia.