Analysis: Managing ringgit key to keeping inflation in check
KUCHING: Managing the ringgit movement would be key in keeping inflation in check, the research team at Kenanga Investment Bank Bhd (Kenanga Research) observed in a report.
According to Bank Negara Malaysia’s (BNM) Financial Stability Review (FSR) report for the second half of 2023 (2H23), the research team noted that a large underlying concern in the domestic financial system comes from a stubborn weakness in the ringgit, which BNM attributed to regional monetary policies being more hawkish and rendering domestic financial instruments less attractive.
“That said, BNM believes that appreciation for the ringgit is forthcoming given the abovementioned strengthening fundamentals.
“On the other hand, closer engagement with large corporates and institutions with heavy foreign currency holdings are ongoing to encourage greater utilisation of proceeds and conversion back to support local exchange rates.
“Managing the ringgit would be key in keeping inflation in check, with BNM eyeing headline inflation to range between two to 3.5 per cent and core inflation at two to three per cent, which had already accounted for a higher implemented SST and low value goods tax.
“Assuming the above sustains, BNM is hopeful to strike a GDP growth of four to five per cent in 2023, which is within our inhouse expectation of 4.7 per cent,” it said.
Meanwhile, on the domestic banks’ performance, Kenanga Research noted that the banking sector continued to exhibit sustainable performance while still supporting a greater demand for loans. Industry liquidity coverage remains flushed at 161 per cent (June 2023: 154 per cent) while loan loss cover was sufficient, hovering above 100 per cent at 119 per cent (June 2023: 116 per cent).
“We note that credit cost charges of 16bps is above a prepandemic average of 14bps, but we gathered that 2023 could see a slightly higher uptick to readings with the expiry of assistance programs.
“Overall, we continue to opine asset quality risks are behind us with industry GIL of 1.6 per cent (June 2023: 1.7 per cent) marking a reversion back to pre-pandemic levels,” it said.
“While BNM did not offer explicit guidance on monetary policies, we believe they are more likely to maintain OPR at three per cent throughout 2024.
“Considerations for changes require to be supported by data-driven findings, which we reckon could be to quell higherthan-expected inflation from the spillover of targeted fuel subsidies, and ringgit hampering import costs.
“On the flipside, BNM appears to hold expectations for US Fed Rates in line with street estimates at three 25bps cuts for the year.
“Given its wider spread relative to our OPR, should BNM follow suit, we believe we may end up seeing on 25bps cut on our end,” Kenanga Research added.
“Overall, we are encouraged by the findings in the 2HFY23 FSR to attest to the resiliency of our local banking landscape.
“We gathered that several corporates may hold a more modest tone for 2024 on the back of forex-related headwinds and uncontained inflation.
“However, we believe the worst may have already passed us with the banks having faced its biggest challenge when navigating against tightening funding costs in 2023.
“On a brighter note, most banks hold confidence in maintaining asset quality with risks (albeit minor relative to overall books) stemming from the remaining balance of their respective repayment assistance accounts,” the research team opined.