Summary

The Malaysian Ringgit has exhibited a promising performance year-to-date (YTD), displaying resilience in the face of external challenges. At the point of writing, the Ringgit has only experienced a modest 4% depreciation against the US dollar, weakening from RM4.4045/USD at the end of 2022 to RM4.5796/USD currently. Looking ahead to this half of the year, a consistent and gradual strengthening of the Ringgit against the US dollar is anticipated. Presently, we remain optimistic, projecting the Ringgit to attain RM4.30-4.40 levels against the USD by the close of December 2023. That should lead to an average of RM4.40/USD (YTD: RM4.48/USD).

Incorporating a concise summary of our comprehensive observations of the Ringgit's performance across various electoral periods, a notable departure from historical trends emerged subsequent to the 15th general election (GE15). Moreover, the recent election outcomes over the weekend have further underlined the potential for better prospects for the local currency after an initial kneejerk selling. The unity government's ability to defend its three states, of which two are economically very important, has paved way for continuity in status quo but it is imperative for the government to meticulously execute its strategies and announcements after subjecting them to vigilant scrutiny. However, it is pivotal to note that maintaining public confidence hinges on the precision and clarity with which the government administers the country and delineates policy directions. Any uncertainties or ambiguities in these domains could potentially lead to a decline in public confidence.

Better Ringgit Performance to Date

The Malaysian Ringgit has demonstrated a positive performance year-to-date (YTD), rebounding from challenges posed by external factors. These include the assertive global monetary tightening, primarily led by the US Federal Reserve, a dip in commodity prices, and China's economic deceleration. On top of that, the uncertainties surrounding domestic political matters also contributed to the weakness previously.

Despite these headwinds, the Ringgit has exhibited resilience by gradually appreciating, thus far. Notably, it reclaimed ground beneath the significant psychological threshold of RM4.60/USD since 13th July 2023. Moreover, on 31st July 2023, it marked its strongest point since the middle of May 2023 at RM4.5078/USD before encountering a subsequent pullback. It is now hovering in the range of RM4.55 to RM4.60/USD.

As of 11th August 2023, Ringgit only weakened by 4.01% against the dollar to RM4.588/USD, from RM4.4045/USD as of end-2022 (vs. 1H23’s -5.63% YTD). Among various global currencies, the Ringgit's depreciation has been most pronounced against the Indonesian Rupiah, falling by 6.60% YTD. It has also depreciated against the Euro by 6.55% YTD, the Indian Rupee by 4.05% YTD, and the Hong Kong Dollar by 3.97% YTD. While many other currencies have appreciated against the Ringgit, the extent of these advancements has dwindled in comparison to previous months.

Conversely, the Ringgit has displayed appreciation against the Japanese Yen by 5.77% YTD, the Chinese Yuan by 0.73% YTD, and the South Korean Won by 0.47% YTD.

A Shift of Trend?

Traditionally, state elections in Malaysia have aligned with general elections, but states possess the autonomy to dissolve their individual assemblies independently. In the preceding general election of 2022, a departure from this norm was witnessed. Specifically, only three states — Perlis, Perak, and Pahang — opted to dissolve their state assemblies and conduct concurrent state elections. Simultaneously, another four states — Sabah, Malacca, Sarawak, and Johor — decided to hold their state elections prior to the 2022 general election. This alteration was precipitated by the prevailing political turmoil during that period. This situation resulted in six states, namely, Selangor, Kelantan, Terengganu, Negeri Sembilan, Kedah and Penang choosing not to dissolve their assemblies during the general election, thus abstaining from conducting state elections at that juncture.

Figure 3 illustrates a compelling case study that delves into the intricate relationship between the Malaysian Ringgit and the nation's electoral cycles. Summarising our comprehensive findings pertaining to the Ringgit's performance throughout various electoral periods, it becomes apparent that instances of Ringgit’s deceleration were notably evident after the 1990, 1995, 2008, 2013, and 2018 elections. During these years, the Ringgit consistently exhibited a decline in value, averaging -0.7%, - 2.7%, -4.7%, -7.0%, and -7.1% occurring in the first, third, sixth, ninth, and twelfth months respectively.

However, a discernible shift in trend materialised following the GE15 as it recorded a positive momentum in the first 6 months after the election. Although certain months post-GE15 displayed intermittent Ringgit volatility (an overall bearish momentum took root primarily due to external influences), there is evidence of inclination of market participants to invest in the local currency, a sentiment likely fostered by the compelling initiatives of the new government. Despite its nascent stage, this endeavour possesses the potential to captivate a greater number of investors and traders, thus revitalising interest in Malaysia.

It remains paramount to acknowledge that the impacts of these governmental actions or measures are, as of now, preliminary in nature. Nevertheless, they hold the promise of laying a robust foundation for heightened investor confidence, drawing parallels with the Madani framework. This, in turn, could catalyse a positive trajectory for both the Malaysian economy and its currency.

Based on the recent election outcome over the weekend, a positive outlook may emerge for the local currency as the election outcome was within expectations. Particularly, the Election Commission announced that Datuk Seri Anwar's multi-coalition government won in Selangor, Penang, and Negeri Sembilan. Meantime, the opposition Perikatan Nasional bloc, which includes the conservative Pan-Malaysian Islamic Party (PAS) and Bersatu, has secured Kedah, Kelantan and Terengganu. Consequently, it seems plausible to anticipate that the Ringgit will likely mirror the trend witnessed in November of the previous year, aligning with our projected trajectory.

Nevertheless, it's crucial to recognise the impact of financial data on market sentiment. While the projected trajectory appears encouraging, it's important to acknowledge the inherent downside risks that persist within the current landscape. Furthermore, considering that the unity government is still relatively new, it's imperative to exercise caution. The government's actions and announcements must be executed with precision and closely monitored. If uncertainties arise in the administration of the country or if policy directions remain unclear, there's a possibility of waning public confidence. This potential decline in confidence could potentially alter the trajectory we have forecasted. As such, a watchful eye on the government's performance and policy execution remains vital for a comprehensive assessment of the currency's future trajectory.

Source: TA Research - 15 Aug 2023