BNM: The ringgit is undervalued

After hitting 26-year low against the us dollar, economists expect rebound ahead

PUTRAJAYA: The ringgit is expected to trade higher on the back of positive economic prospects, says Bank Negara Malaysia (BNM) governor Abdul Rasheed Ghaffour, while acknowledging that the currency is currently undervalued.

“The ringgit is undervalued. Given Malaysia’s positive economic fundamentals and prospects, the ringgit ought to be traded higher,” Abdul Rasheed said yesterday, as the currency hit a 26-year low on Feb 20 to trade at RM4.80 to the US dollar.

One analyst, Dr Mohd Afzanizam Abdul Rashid of Bank Muamalat Malaysia Bhd, echoed this analysis by saying that the local note’s fair value is closer to RM3.90 to the US dollar.

BNM says it has stepped up engagements with government-linked investment companies, government linked companies, corporations and investors to encourage continuous inflows to the foreign exchange market.

Afzanizam, chief economist at Bank Muamalat, said the ringgit has been hovering below 100 points on both the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) indices.

“Theoretically, the ringgit should move towards its fair value. However, at the current juncture, the forex market is too distorted by external factors, leading our ringgit to deviate from its fair value which is RM3.90,” he added.

Bernama quoted Capital Dynamics Asset Management Sdn Bhd managing director Tan Teng Boo as saying that the ringgit is expected to trade at 4.20-4.40 against the US dollar by year-end.

This is in view of the potential interest rate cut by the US Federal Reserve in anticipation of an economic recession in the United States this year.

Afzanizam said the country’s current account surplus at 1.2% of gross domestic product (GDP) is one of the factors that could strengthen the ringgit.

“The fiscal balance also plays a role as they are the driver for GDP growth,” he said, adding that the fiscal deficit has been going down from 5.6% of GDP in 2022 to 5% of GDP in 2023.

The deficit could be further lowered once the Public Finance and Fiscal Responsibility Act is in place, Afzanizam added.

“Our sovereign rating is still above investment grade. That could really explain why foreign investors continue to have exposure in our government debt securities.

“As of January, foreign investors owned 33.8% of total Malaysian Government Securities (MGS) outstanding,” he added.

At market close yesterday, the ringgit ended at 4.7585/7635 against the US dollar.

Year-to-date, the ringgit has lost close to 4% in value.

The ringgit weakened as much as 0.2% to its lowest level since January 1998.

Regional currencies like the South Korean won and Taiwanese dollar inched 0.2% and 0.3% lower, respectively.

On Feb 23, Prime Minister Datuk Seri Anwar Ibrahim said the current weakening of the ringgit could not be compared to the 1998 Asian financial crisis.