Economists see positive signs for Malaysia’s economy despite challenges

According to economists, recent efforts by our government to support the ringgit are bearing fruit. In March, Bank Negara Malaysia (BNM) urged exporters and those with investments abroad to repatriate their profits and earnings back to Malaysia. The central bank also told businesses to defer new investments overseas and to hedge their offshore investments to help prop up the ringgit.

This has resulted in an expansion of Malaysia’s international reserves, for instance – they’ve risen from US$108.5 billion in October last year to US$113.4 billion in March, and it’s a promising sign, according to Afzanizam Rashid, chief economist at Bank Muamalat Malaysia Bhd:

“With higher reserves, the central bank is better equipped to intervene in the forex market (if needed),” – Afzanizam Rashid, in an interview with Free Malaysia Today

He said BNM’s gradual increase of the overnight policy rate has also succeeded in keeping inflation on an even keel without affecting growth. The OPR was reduced from 3% to 1.75% during the Covid-19 pandemic but since the global economic turnaround as the Covid-19 threat eased, the OPR has been raised gradually to 3% as of May last year.

Afzanizam noted that the inflation rate has decelerated from 4.7% in August 2022 to 1.8% in February this year.

Barjoyai Bardai, provost at University of Science and Technology, said the fact that Malaysia has managed to accumulate reserves exceeding RM520 billion shows that the ringgit is backed by good fundamentals.

“The local currency may have under-performed against some regional currencies but it has remained resilient amidst global uncertainties and wars,” Barjoyai Bardai, to Free Malaysia Today

BNM has also reaffirmed its plan to ensure and orderly functioning of the foreign exchange market and to support government-linked funds, corporations and exporters to boost liquidity.

And while sentiments remain positive, both economists pointed out not everything is rosy.

The gap between Malaysia’s OPR and US interest rates is a concern

As of today, US Federal Funds Rate stands at 5.5%, which is 250 basis points above the Malaysian OPR. Afzanizam pointed out that the higher interest rate in the US will attract more money there.

“For instance, the 10-year yield for US government bonds is around 4.2% while that for Malaysian government bonds is 3.96%. Investors will find it more appealing to invest in the US,” – Afzanizam Rashid, to Free Malaysia Today

He said the interest rate differential could have also caused the fluctuation in the ringgit, and while this will continue to be a challenge, we’ll just have to wait and see how things play out. Afzanizam also said the US Federal Reserve may decide to speed up rate cuts if the trend of low inflation continues and the economy remains weak.

According to the chief economist of Bank Muamalat, the focus must now shift towards sustaining growth given that higher interest rates can have a deep impact on the economy.

Barjoyai said there are complexities involved in efforts to bolster the value of the ringgit, and addressing problems such as the rising Malaysian government statutory debt level must be given priority.

“To attract more investments while the ringgit remains weak, it is important to build confidence… Efforts to stimulate positive sentiments, enhance economic fundamentals and addressing key issues such as foreign worker remittances that exceed RM60 billion, are important,” – Barjoyai Bardai, to Free Malaysia Today.