Rising U.S. Dollar concerns

KUALA LUMPUR: The further depreciation of the ringgit has raised concerns about the increase in the cost of imported goods and continuous depletion of Bank Negara Malaysia’s net reserves, economists said.

As the ringgit kept sliding against the US dollar, economists opined that the impact would trickle down to consumers.

Kenanga Research economist Afiq Asyraf Syazwan Abd Rahim said higher prices of imported goods were pushing consumer prices, thus reducing the purchasing power of Malaysians.

“On top of that, a weak ringgit will also increase the cost of US dollar-denominated debt,” he told the New Straits Times.

Afiq said there was also a probability of a decline in Bank Negara’s reserves as the strong US dollar decreased the conversion value of other currency-denominated assets.

Additionally, Bank Negara might utilise its foreign currency reserve in the foreign exchange (FX) intervention operations.

“As of Aug 30, 2022, it (Bank Negara’s reserve) is still sufficient to finance 5.4 months of imports of goods and services (higher than the traditional rule of thumb of three months of imports).

“So for the time being, it is still considered to be adequate to act as a buffer to maintain orderly domestic FX market conditions.

“However, due to the heightened level of uncertainties and prospects of a weak global economic growth, we should remain concerned by the continuous depletion of the net reserves,” he said.

Despite the current economic environment, Afiq said the risk for stagflation was still quite low for Malaysia as inflation might continue to remain manageable while the labour market was expected to strengthen further moving into 2023.

“However, globally, the current combination of high inflation and slow economic growth raises the risk of a stagflation moving into the second half of 2023,” he said.

OCBC Bank FX strategist Christopher Wong said while the ringgit had hit a historical low against the dollar, the decline in the former was due to the strong value of the latter, which also hit other regional currencies.

“In fact, among the regional Asian FX, the ringgit’s decline is by no means one of the weaker ones.

“Year-to-date, the ringgit fell eight per cent versus US dollar while most Asia ex-Japan foreign exchange including Thai baht, Chinese renminbi, Philippines peso, Taiwan dollar and Korea won depreciated by a larger magnitude of between nine per cent and 15 per cent.

“To put in perspective, the ringgit is relatively stronger against some of these regional trade partner currencies,” Wong said.

Looking ahead, he said the environment might increasingly turn more challenging, especially with higher rates and inflation globally.

The slowdown in China and Europe further added to global growth concerns and might affect Malaysia’s export performance.

“While commodity prices have largely been rising, price movement is not one way and volatility is heightened with oil prices and palm oil prices coming off in recent months.

“As such, the ringgit would still be exposed to swings in commodity prices,” said Wong.

He said the ringgit movements were also closely correlated with the Chinese renminbi offshore.

This partially reflects the China-Malaysia trade relation, where China accounts for about 23 per cent to 24 per cent of Malaysia’s exports.

“So in the event of a sharp depreciation in renminbi, the ringgit is inclined to depreciate as well,” added Wong.

Putra Business School associate professor Dr Ahmed Razman Abdul Latif said the ringgit slide was temporary in nature due to uncertainties affecting the US market and consequently the US dollar position.

“Therefore, the negative impact is still minimum as we expect uncertainties with regards to the US dollar will not persist for long,” he said.

NST