Bank Negara: Ringgit still far from fair value

The ringgit is now priced more efficiently and increasingly more reflective of Malaysia’s strong fundamentals, as the influence of external factors have been squashed. However, it is far from reflecting its fair value due to misperceptions.

Bank Negara governor Tan Sri Muhammad Ibrahim attributed this to the measures introduced by the Financial Market Committee (FMC) and Bank Negara, which was part of an overall strategy to deepen and broaden the financial market.

He pointed out that during the early part of 2017, which was a period of significant capital outflows, the spike in bond yields was shortlived while the ringgit exchange rate remained well-supported.

“This was due to the net export proceeds conversion rule that helped to balance the flows.

“Short-term positions by non-resident investors exited the market, and the majority of non-resident holdings now comprised of longer-term investors, providing stability and depth to the domestic bond market,” he said.

Muhammad said this in his keynote address at the Financial Markets Association, Malaysia annual dinner entitled “Of perception, sentiment and reality” last Friday.

The ringgit was up 0.1% to the US dollar at 3.30pm on Monday. Year-to-date, it was at 4.1557 to the greenback. The ringgit is the third-best performer against the US dollar since January, rising 7.93%, but behind the South Korean won and the Thai baht. He said the measures removed the external destabi- lising influence of offshore to the onshore market, while at the same time creating a conducive environment for the domestic financial market to develop.

“Nevertheless, questions remain as to why the ringgit is far from reflecting its fair value.

“Numerous research pieces by analysts based on real effective exchange rates, have, in fact, indicated that the ringgit is one of the most undervalued emerging-market currencies.

“Despite strong gross domestic product data for the first three quarters and a better-than-expected export performance in 2017, the ringgit exchange rate movements have remained lethargic, with flows and sentiments still driven by external factors and foreign players,” he said.