RINGGIT WILL NOT FACE EXTEME VOLATILITY THANKS TO MANAGED FLOAT

ROSEMARIE KHOO MOHD SANI

 

KUALA LUMPUR, Feb 26 (Bernama) -- Since political uncertainty hits the local economic landscape, causing the collapse of the Pakatan Harapan led government, the ringgit performance has been under pressure since early this week.

Comparatively, from Friday to Monday; after the dissolution of the government’s Cabinet, the ringgit losses 0.8 per cent of its value against the US dollar to 4.2240 from 4.1900 on Friday.  

(At today’s close, the ringgit was quoted at ….. against the greenback.) 

Since then to date (Wednesday), the ringgit has moved on a minimal basis point as Bank Negara Malaysia (BNM) has given assurance that they would constantly monitor the political developments while ensuring the financial system is intact.   

Do note that over the week; global markets and currencies have also weakened in light with the latest update on the COVID-19 health crisis globally. 

Among the countries outside China that were badly hit by the virus spread as of date is Iran which recorded 16 death, South Korea (12) and Italy (10). 

San Francisco which is one of the key states in the US has declared a state of emergency due to COVID-19.

The reason behind the minimal volatility of the local note over was attributed to the move by BNM in 2005, where it announced that the exchange rate of the ringgit would be allowed to operate in a managed float, with its value being determined by economic fundamentals. 

“The central bank would monitor the exchange rate against a currency basket to ensure that the exchange rate remains close to its fair value, and promoting the stability of the exchange rate continues to be a primary objective of policy,” the central bank said in a note published on its website.

Prior to that, the local currency was pegged to the US dollar after periods of extreme volatility during the Asian financial crisis in the late 1990s and was reviewed then as the greenback was causing the ringgit to depreciate against major currencies.

Unlike managed float, the free float of currency solely determined by market forces of demand and supply of foreign and domestic currency, and where there is no government intervention. 

 

Ringgit performance influenced by political uncertainty and COVID-19 

 

When asked about the ringgit performance, Sunway University Business School Economics Professor Dr Yeah Kim Leng said although the ringgit is currently weakened by the political turbulence and COVID-19 outbreak, the ringgit is unlikely to decline to its worse, once the new government is constituted.

"Its short term fair value remains well supported by ample domestic liquidity, continuing current account surplus, on-going positive growth, below the trend of inflation, and interest rate differentials against most developed economies including the US," he told Bernama. 

As of now, investors are waiting for the meeting between Yang di-Pertuan Agong Al-Sultan Abdullah Ri'ayatuddin Al-Mustafa Billah Shah with all 222 Member of Parliament to conclude, which is expected to be today evening. 

They are also awaiting the much anticipated economic stimulus package which is expected to be announced tomorrow the interim Prime Minister, Tun Dr Mahathir Mohamad. 

Yeah, who is also the Deputy President of Malaysian Economic Association also commented that if there is a need to peg the ringgit, it should only be used as a last resort when faced with massive capital flight and loss of investors' confidence. 

"A flexible currency enables the economy to adjust to external shocks such as the COVID-19 epidemic. For example, countries like Australia has seen its currency depreciating sharply due to its strong trade linkages with the Chinese economy which is hard hit by the epidemic," he added.

While echoing the same view, meanwhile, FXTM's market analyst Han Tan said the political developments in Malaysia will leave investors to ultimately interpret the political manoeuvring through the lens of policy continuity in determining whether the ringgit should remain on the weaker side of 4.20 against the US dollar.

"Should the mix of downside risks grow more potent, US dollar-ringgit may carve out a path towards the 4.24-4.25 region, until there is more clarity with regards to Malaysia’s policy and economic outlook," said Han Tan.

In conclusion, analysts are upbeat the market would rebound back after all dust settles and the silver lining of the political uncertainty are clear, backed by Malaysia’s diversified economic portfolios as well as its solid fundamentals. 

-- BERNAMA

 

TAGS:

 

Ringgit, BNM, COVID-19, Dr Yeah Kim Leng, Han Tan