Malaysia's central bank, Bank Negara Malaysia (BNM), has announced intensified measures to encourage foreign-exchange inflows, including efforts to boost the repatriation and conversion of companies’ overseas earnings. This move comes as the ringgit experienced significant weakening, becoming Asia's worst-performing currency in June, depreciating by 4.30%. Analysts believe these measures will help stabilize sentiment and temper depreciation pressures, potentially leading to a rebound for the ringgit. The central bank reiterated that Malaysia's solid economic fundamentals will continue to underpin the currency, with trade expected to remain resilient due to the global artificial intelligence super-cycle.
Standard Chartered Global Research noted that the ringgit's recent weakness is largely due to external market dynamics and portfolio adjustments, rather than a deterioration in Malaysia’s economic fundamentals. Factors contributing to the depreciation include non-resident investors rebalancing portfolios after the ringgit's strong performance earlier in the year, increased foreign exchange hedging amid a stronger US dollar, and expectations of higher US interest rates. Despite these headwinds, Standard Chartered maintains a constructive medium-term outlook for the ringgit, citing Malaysia's resilient external position and robust first-quarter balance of payments surplus equivalent to 3.2% of GDP.
The Financial Markets Committee (FMC) attributed the depreciation primarily to non-resident investors rebalancing their portfolios. Unlike previous statements during periods of currency weakness, the FMC's latest tone was less concerned, not indicating that the depreciation was inconsistent with economic fundamentals or excessive. This reflects a view that the ringgit's current valuation is not significantly undervalued, with its nominal effective exchange rate (NEER) and real effective exchange rate (REER) remaining about 7% above their respective 10-year averages. BNM will continue to monitor financial market developments closely and aims to smooth excessive currency volatility, but is not expected to aggressively defend a specific exchange rate level as long as market conditions remain orderly.
These measures are seen as a continuation of efforts that previously helped buoy the ringgit in 2024 after it fell to its weakest level against the dollar since 1998, leading to it becoming the top-performing Asian currency that year. Economists also view BNM's framework, combining a free-floating exchange rate with non-interest rate interventions and coordinated repatriation efforts with government-linked entities, as effective in managing currency volatility and anchoring the ringgit. However, the ringgit is expected to remain vulnerable in the near term amid external headwinds, stronger US dollar sentiment, and continued portfolio flow volatility.
