If you’ve been paying attention to the news, you may have heard that the Malaysian Ringgit has been on the rise. Just a few months ago, headlines were all about the Ringgit hitting record lows against the US Dollar and Singapore Dollar. However, it’s making a bit of a comeback, and that’s caught a lot of people’s attention. In this article, we do a short breakdown of why the value of Ringgit is finally appreciating.
Reasons for the Ringgit Rising
1. BNM’s Foreign Exchange Conversion Measures
Bank Negara Malaysia (BNM) implemented measures to encourage the conversion of foreign exchange income held by government-related companies, corporations, exporters, and investors into Ringgit. This increased demand for the Ringgit in the foreign exchange market, leading to its appreciation. In the first quarter of 2024 alone, Malaysia saw a notable increase in foreign exchange conversions compared to the previous year. This influx has strengthened the local currency, making it one of the best-performing currencies in the region. By mid-2024, the Ringgit had appreciated by 2.8% month-on-month, reflecting the impact of these conversion measures.
2. Favourable Domestic and External Factors
The Ringgit has benefited from a combination of favourable domestic policies and external factors, particularly under the Malaysian government’s Madani framework, which emphasises sustainability, innovation, and prosperity. This economic approach aims to enhance the country’s macroeconomic fundamentals. The government’s commitment to strengthening the Ringgit is evident in its efforts to liberalise foreign exchange policies and boost demand for the Ringgit in the international market. The focus on improving economic capacity and infrastructure aligns with the long-term vision of the Madani government, which seeks to create a more resilient and competitive economy.
3. Stable Monetary Policy
Bank Negara Malaysia’s decision to maintain the Overnight Policy Rate (OPR) at 3% has been another a key factor in stabilising the Ringgit. By keeping interest rates steady, BNM has made Malaysian assets more attractive to investors, boosting demand for the Ringgit. This policy also helps control inflation, ensuring that the Ringgit retains its purchasing power. Additionally, the consistency in monetary policy fosters investor confidence, which further supports the Ringgit’s value in the global market. Overall, this stable approach has contributed to the Ringgit’s recent strength.
4. Increased Foreign Investments
There has been a rise in foreign investments in Malaysian equity, which has further strengthened the Ringgit. The narrowing gap between Malaysia’s 10-year Malaysian Government Securities (MGS) yield and US Treasury yields, combined with expectations of US interest rate cuts, have made the Ringgit more attractive to investors. As the gap between Malaysian and US interest rates narrows, Malaysian assets become more appealing to both domestic and international investors. This is because the relative returns on Malaysian bonds
5. Weakening of the US Dollar
The US Dollar has been weakening due to underwhelming economic data from the US and expectations of interest rate cuts by the Federal Reserve. As of now, the Dollar Index has declined by 2.01%, largely due to the anticipation of the Fed’s rate cuts in September. Lower interest rates reduce the returns on bonds and fixed deposits, making them less attractive to investors. This decreased demand for the Dollar indirectly supports the appreciation of the Ringgit.
6. Economic Growth and Infrastructure Development
Malaysia’s economy is expected to grow by 5.8% in the second quarter of 2024, with low inflation at 2%. This growth is driven by private-sector investment, infrastructure projects, and increased economic activity. This positive economic outlook has supported the Ringgit’s recovery and growth. Additionally, stronger exports, particularly in the electrical and electronics sectors, have increased foreign receipts, further supporting the Ringgit.
Conclusion
The Ringgit’s recent rise definitely shows that there just might be some hope for Malaysia’s economy. While there are certainly some challenges that remain, the current momentum offers a hopeful glimpse into a future where Malaysia’s currency continues to strengthen.
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