The ringgit and prosperity targets

THE ringgit received a boost following the US Federal Reserve’s (Fed) decision to lower its funds rate by 25 basis points, bringing the target range to 3.5% to 3.75%.

This reduction narrows the gap between the US rate and Malaysia’s overnight policy rate (OPR), which stands at 2.75%.

The ringgit has notably benefitted from this narrowing of the interest rate differential.

The local bond market has gained this year as investors sold off equities and bought bonds worth RM22bil.

UOB Research in a report says Malaysia recorded a second consecutive month of foreign portfolio inflows in November, with net inflows surging to RM4.9bil from RM1.7bil in October. 

“This was driven entirely by the largest non-resident purchases of Malaysian debt securities in six months (plus RM6.1bil vs plus RM4.4bil in October), which more than offset continued foreign selling in equities (minus RM1.1bil vs. minus RM2.7bil in October).

In addition, the report reveals that Bank Negara Malaysia’s (BNM) foreign reserves increased for the eighth consecutive month by US$300mil month-on-month to US$124.1bil at the end of November, marking the longest streak of gains since 2017. 

It says that BNM’s net short position in foreign exchange swaps widened by US$300mil to US$20.85bil in October, representing 16.8% of total foreign reserves.

UOB Research believes that capital flows into emerging markets (EMs), including Malaysia, are expected to stay firm in 2026, supported by anticipated Fed rate cuts, a softer US dollar, and stronger EM growth prospects. 

“Recent trade agreements and a temporary US-China truce for one year have eased geopolitical risks and trade uncertainty, providing near-term tailwinds.

“Combined with domestic growth drivers, these factors will position Malaysia as an attractive destination for capital inflows,” it says.

In recent weeks, the ringgit has gained due to inflows and a slight weakening of the US dollar index. While some may compare this to the ringgit’s movement against the US dollar, in reality, it has been seen against a basket of currencies.

The ringgit has reached multi-year and all-time highs against a basket of regional currencies, illustrating that its movement is not solely correlated with the US dollar’s weakness.

US interest rate cuts will boost the US stock market, and that will attract money from around the world.

As long as the United States remains a magnet for investors, it is imperative to maintain a vibrant stock market with companies with strong prospects instead of simply listing more companies each year.

As listed companies innovate and show an appetite for risk-taking that is aimed at growing earnings, then foreign investors too will buy local equities in large amounts, bolstering the local buying by institutions that have shielded the market this year.

As the ringgit appreciates, this can affect companies positively or negatively. Companies that import capital goods or raw materials will see a marginal expansion.

Malaysian companies that complain a stronger ringgit is hurting their exports then have to become more competitive. It’s time to focus on productivity.

Look at Singapore. The country prospered as its dollar strengthened. Having the right policies and execution are important for long-term prosperity.

Then there’s China. The yuan has weakened slightly against the dollar but the country registered a US$1.07 trillion trade surplus this year up to November. 

This is because China has increased its exports to non-US destinations.

Its goods are globally competitive and its industrial base allows it to manufacture what it would otherwise have to import.

Let that be a lesson to those who say that manufacturing has lost its lustre to consumption.

Malaysia should take a leaf from China and make goods the world wants instead of complaining that a strong ringgit will hurt exports.

As for the next Monetary Policy Meeting on Jan 22, the idea should be to keep the OPR where it is. The economy grew nicely by 5.2% in the third quarter from 4.4% in the second quarter.

The economy is projected to grow by between 4% and 4.5% next year. Based on recent trends, it will be at the upper end of that forecast.

With interest rates remaining where they are and policies working to see good economic performance next year, the ringgit should continue to gain in the months ahead.

There is a chance to incorporate policies that will maintain the ringgit’s strength instead of focusing on raw export performance without foundational change, which will not meet prosperity targets.