Ringgit to regain strength towards year end

by **Cals** Wed 24 Feb 2016, 03:12

Ringgit to regain strength towards year end

By Billy Toh / The Edge Financial Daily | February 23, 2016 : 9:49 AM MYT

This article first appeared in The Edge Financial Daily, on February 23, 2016.

KUALA LUMPUR: UOB Malaysia expects the ringgit to remain volatile due to external noises, but to rebound stronger towards year end as domestic headwinds recede, especially on the political front and resolution of 1Malaysia Development Bhd issues.

“Our year-end forecasts are expecting a stronger ringgit against the US dollar, but in between, there could be a lot of volatility. We are expecting it to fluctuate in the range [of] between 4.10 and 4.40.

“It depends on the path of US interest rates, [economic growth in] China, crude oil prices and geopolitical risk. For [the] year-end target, we’re looking at 4.10,” said UOB economist Julia Goh.

The external factors that are driving ringgit volatility include the US Federal Reserve’s (Fed) interest rate hike cycle, China’s policy to moves from quantity to quality growth, volatility surrounding the yuan and crude oil prices. UOB lowers its expectations of the Fed’s interest rate hike cycle to two interest rate hikes instead of four.

As for China, Goh is not expecting a hard landing there and believes the situation in the world’s second-largest economy is not as bad as painted.

External factors aside, Goh is quite bullish on the local currency. She also commended the government’s move to address the fiscal slippage in the revised Budget 2016.

Goh noted that the ringgit was the worst currency performer last year against the US dollar. However, it has reversed the trend, being one of the strongest performing Asian currencies in the first six weeks of 2016.

She said the rally was likely aided by dissipated US dollar strength, funds repatriated from abroad and Bank Negara Malaysia’s (BNM) efforts to boost domestic liquidity by reducing the statutory reserve requirement (SRR) ratio to 3.5%.

“In the coming months, we expect the ringgit to continue to be supported by the country’s diversified export base, sustained current account surplus and the government’s ability to manage fiscal risks from weaker oil prices,” Goh said, adding that the retirement of BNM governor Tan Sri Dr Zeti Akhtar Aziz could break the ringgit’s momentum.

On Malaysia’s gross domestic product growth, Goh said the 4.5% growth in the fourth quarter last year showed a degree of underlying resilience for the domestic economy.

Growth is expected to moderate further going into the first half of 2016, due to a higher base effect as well as lingering external risks.

UOB believes that the government measures announced last month, such as tax relief for middle-income households and reduction in Employees Provident Fund contribution rates, should aid an expected recovery in the second half of 2016. UOB is holding on to its growth outlook for Malaysia at 4.2% this year given the clouded external environment.

“We are generally expecting growth to ease further in the first half of this year, but with government support measures expected to take off in the second quarter, we expect things to improve in the second half of the year to an average of about 4.5% and subject to external developments,” she added.

Meanwhile, on interest rates, she said UOB is keeping its year-end forecast of 3.25% for the overnight policy rate (OPR).

However, she noted that should the growth outlook turn gloomier, additional monetary support through OPR or SRR cuts may be necessary.