SUMMARY

● After three decades since its official birth in 1967, the underlying strength of the ringgit (MYR) was truly tested during the 1998 Asian Financial Crisis (AFC). Despite having gone through several economic growth cycle since AFC, it has not really regained its lustre to reflect the potential growth dynamism of an emerging economy.

● Amongst ASEAN-5, MYR is perhaps one of the most undervalued currency, followed by IDR , whilst SGD, THB and PHP have been either fairly valued or even sometimes overvalued since 2010.

● MY and ID have demonstrated higher average GDP growth over the last ten years, but our analysis showed that the IDR and MYR have been underperforming relative to SGD and THB.

● Post-AFC, ID and MY have recorded higher interest rates relative to TH and SG, but the accompanying greater inflationary pressure and structural weakness in the domestic economy contributed to a weaker IDR and MYR.

● MY's FX reserves only expanded 3.6 times since 2000, marking the smallest gain amongst ASEAN-5 economies which averaged 5.3 times.

● While a sustained and higher CA surplus resulted in a stronger SGD and THB, MYR seemed to be relatively weak though it recorded a sustained CA surplus over the last 20 years.

● Despite MY’s lower and manageable government debt level compared to SG, MYR hugely underperformed SGD

● An unpredictable political climate may continue to weigh on the MYR as evidenced by the fact that it has remained above the USDMYR peg-level of 3.80 primarily since the revelation of the 1MDB scandal which eventually toppled the Barisan Nasional government in the 2018 General Election.

● Efforts to realise the underlying value of the MYR, shifting from the prolonged state of being undervalued to fairly valued would require a multi-pronged strategy focussing on restoring investors’ confidence: strengthening economic fundamentals, long-term political stability, better governance, as well as progressive and forward looking policies.

● Aside from the lingering uncertainty, the weakening USD due to the Fed’s conviction to remain status quo on its monetary policy as well as the impact of huge stimulus and COVID-19 vaccine optimism would support a relatively firmer MYR till at least next year. Our year-end 2021 USDMYR forecast is 3.95.

Source: Kenanga Research - 21 Dec 2020