Is This the Beacon of Light for MYR?

BMI, a Fitch Solutions company, has projected that the ringgit will likely continue to strengthen in the latter half of 2024 and early 2025, with an expected value of RM4.40 against the US dollar by the end of 2025.

This projection is primarily attributed to anticipated further policy relaxation, amounting to 150 basis points (bps), which would potentially bring down the United States Federal Reserve (Fed) funds rate to 3.00 per cent by December 2025. Additionally, BMI highlights other contributing factors outlined in their recent statement.

BMI anticipates stability in the spread between policy rates and bond yields across the US and Malaysia, which is considered a significant factor in supporting the ringgit's momentum.

In contrast to the outcomes of the Fed's March meeting, where a more dovish stance was observed, BMI maintains its projection of a 100 bps reduction in the Fed's funds rate this year, down to 4.50 per cent. This adjustment is considered crucial, particularly in the context of narrowing yield differentials, assuming Bank Negara Malaysia maintains its overnight policy rate at 3.00 per cent throughout 2024.

Regarding Malaysia's external position, BMI foresees a strengthening trend in 2024. Their analysis suggests that the average oil prices, forecasted at US$85.00 per barrel in 2024, slightly surpassing the US$82.18 per barrel recorded in 2023, will likely provide a supportive backdrop for Malaysia's exports, given the significant contribution of oil to total outbound shipments.

Moreover, BMI expresses optimism about the continued acceleration of services exports. Recent data from the tourism ministry, indicating total tourist arrivals in 2023 reaching 20.1 million, surpassing the government's revised target of 19.0 million, though still below pre-pandemic levels, provides grounds for optimism. The recent implementation of a 30-day visa-free entry for Indian and Chinese tourists is anticipated to further boost arrivals, potentially aligning with the government's target of 27.3 million tourist arrivals for the year.

These positive trends contribute to BMI's forecast of Malaysia's current account surplus widening from 1.2 per cent of gross domestic product (GDP) in 2023 to 2.6 per cent in 2024.

Furthermore, BMI emphasizes the resilience of foreign direct investment (FDI) inflows, which are expected to bolster the ringgit. Malaysia's favourable long-term economic prospects, supported by a burgeoning working-age population, position it as an attractive destination for foreign investment in the foreseeable future. Notably, net FDI inflows into Malaysia, as a percentage of GDP, consistently outstrip those of regional counterparts such as the Philippines and Thailand, underscoring its attractiveness to investors.