The weakening US dollar has pushed the Malaysian ringgit to a 13-year high with investors also punting on accelerating inflation which they see as increasing the prospect of the central bank being forced to raise interest rates. Normally rising interest rates and an appreciating currency would indicate underlying strength in the economy and this would support forecasts that Malaysia’s economy will grow by 6.0 percent over the calendar year.

But most Southeast Asian economies are also looking good – with Malaysia out in front – because the economies in the United States, Europe and Japan are performing so badly, and will continue to do so. As such the ringgit will continue to gain over the next 12 months with analysts predicting the unit will hit 2.93 to the dollar within six months, with inflation running at about 3.0 percent. The Malaysian ringgit was worth RM2.50 per one US dollar prior to the Asian financial crisis.

As always currency fluctuations produce mixed results in a well-rounded economy. In Malaysia, prices on foreign goods should fall as purchasing power rises in tandem with the ringgit, while the cost of locally made products can rise with inflation feeding into the system. This isn’t helped by Malaysia’s big foreign income earners, particularly in the resources sector where contracts are usually written with US dollars as the trading currency, resulting in lower returns to the bottom line for companies, shareholders and the government in taxes and royalties.

However, for the same reasons Malaysia is being spared the full impact from rising oil prices which are back above 100 US dollars a barrel. Analysts have calculated that the conflict in the Middle East, particularly in Libya, has added a 30 US dollar risk premium to each barrel of oil. Libya has virtually shut down all oil production.

International Trade and Industry Minister Mustapa Mohamed said the weaker dollar should not have a negative impact on the Malaysian economy. “Overall, it is good for the economy. It will not have an adverse c trends and a rising ringgit. impact at the macro level,” he said. “Some Together they are attracting offshore omising wth last year. This should be helped by current global industries may feel the pressure but it can push them to be more competitive and improve efficiency.”

Economists say the risk remains that Malaysian manufacturing exports could become less competitive as prices rise, however, any downside would be kept to a minimum if the ringgit continues its rise in value against the US dollar alongside other regional currencies. “Either way, as a result, manufacturing companies will need to improve productivity and become more efficient in order to maintain their competitiveness,” one financial analyst said. “If they can do that then that will be very healthy for the country.”

Even then the benefits of current foreign exchange trends are uneven. While the ringgit has strengthened against US, the euro and British pound, it remains weaker to the Australian dollar. The Australian economy has enjoyed strong growth from its exposure to commodity exports like iron ore, lifting its currency to its highest level since it was floated in the early 1990s. Hence Malaysia’s gains against the US and Europe is being partially offset by strength in Australia. Europe will remain weighed down by the global financial crisis with dollars looking for high and safe returns into Malaysia, and this is impacting on sectors like real estate.

TA Securities Holdings Bhd Patricia Oh said the year-to-date strength seen in the local currency against the greenback was in line with the appreciation of other Asian currencies and achieved on speculation of interest rate increases due to rising inflationary risk. “We continue to expect a strong ringgit for the year, backed by a combination of factors including the expectation of further normalisation of the Malaysia’s Overnight Policy Rate (OPR) by the end of this year to 3.5 per cent from the current 2.75 per cent; healthy reserves held at Bank Negara; a boost in sentiments resulting from strong fundamentals of the economy; regional economic rebound; and the move made by the US Federal Reserve to maintain its benchmark interest rate at record low for an extended period,” Oh said.

The optimistic outlook was reflected at Bank Negara where total reserves at mid-April had reached substantial levels of RM369.9 billion and US$122.2 billion in US dollar denomination.

This article was written by Luke Hunt
Source: The Expat June 2011 
This article has been edited for Expatgomalaysia.com
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