KUALA LUMPUR: The ringgit has potential for positive developments due to its undervaluation amid heightened external uncertainties, said Bank Muamalat Malaysia Bhd chief economist and social finance head Dr Mohd Afzanizam Abdul Rashid.
He said the ringgit is undervalued, and suggested that government policy changes are likely to yield long-term results as key to the currency’s potential appreciation.
“If you look at the nominal effective exchange rates, it is about 85%, meaning 50% undervalued. It means that the ringgit has the potential to increase in value. But so far, the undervaluation has been stuck at around that level. So the issue is when the ringgit will appreciate. I think it has to do with the government policies,” he told reporters at the RAM Ratings 2023 Forum today.
On external factors, Mohd Afzanizam said interest rates in the United States will remain high for a considerable period, which leads to an increase in the value of the US dollar and its impact on the ringgit.
“That’s beyond our control. So I think the focus should be on matters closely related to policy reform because that is within the government’s control,” he said.
Additionally, he suggested that central bank intervention, through an increase in the overnight policy rate, is not sustainable for raising the value of the ringgit as it is subject to fluctuations.
“Because, if we are busy trying to intervene in the foreign exchange market, it will not solve the issue. The volatility will not be over. If Bank Negara Malaysia wants to intervene, it will lead to a depletion of reserves. And we know that we can’t really go against the market,“ he added.
However, Mohd Afzanizam acknowledged that the country may need to face a situation where the ringgit will remain weak for the time being.
“The closest implication is that our imports will become expensive. We are well aware that we rely heavily on external sectors and import food from abroad,” he said.
The economist stated the importance of addressing these issues with short-term policy measures such as transfer payments and subsidies for farmers, which can provide immediate relief in response to the challenges posed by the weak ringgit.
“If we expect the central bank to intervene, it’s something I believe will be difficult to do, and we know that the market is very volatile, and if the ringgit’s value is raised, it is likely to be temporary, and it may go down again because of the situation in the United States, which is uncertain,” he said.
Mohd Afzanizam’s official projection of the local currency towards the end of the year is 4.70 to the US dollar.