Bank Negara: Structural reforms crucial
PETALING JAYA: While Bank Negara remains committed to playing its part in preserving confidence in the ringgit, it reiterates that structural reforms are still key to the long-term strengthening of the local currency.

The central bank pointed out that they are crucial not only to ensure stronger and more sustainable economic growth, but they are also need to raise Malaysia’s competitiveness and raise the standard of living of the people.

“In the longer term, structural reforms, which can help to improve Malaysia’s economic prospects, will also provide more enduring support to the ringgit,” Bank Negara governor Datuk Abdul Rasheed Ghaffour said.

Nonetheless, the central bank would continue to take concerted measures to manage the short-term pressure on the ringgit, he said during a media conference in conjunction with the release of Bank Negara’s Annual Report 2023, Economic and monetary review 2023 and Financial stability review for second half 2023.

The measures included intensified efforts to encourage repatriation and conversion of foreign investment income by government-linked companies (GLCs) and government-linked investment companies (GLICs), stepping up discussions with corporates and investors and monitoring conversion behaviour of domestic exporters and importers as well as engaging them on any unusual trends that it observed.

On the repatriation of funds by GLCs and GLICs, Abdul Rasheed said the move was effective as substantial funds had been flowing back since February.

He added that the move would not affect GLICs’ investment portfolios, as only funds from “realised income” would be involved.

Furthermore, there were positive responses from the foreign exchange traders, with most of them agreeing that ringgit was undervalued.

“They appear more willing to hold on to their ringgit positions for longer,” he said.

Abdul Rasheed reiterated that the recent decline in the value of the ringgit was “temporary”, and “due to external factors”noting greater policy rate increases in other countries.

He pointed out that while Malaysia had raised the overnight policy rate (OPR) by 125 basis points from 1.75% to 3% since March 15, 2022, many other countries had increased their interest rates at a higher magnitude over the same period.

Since the beginning of 2024, the ringgit-to-US-dollar exchange rate had depreciated from 4.60 to 4.79 on Feb 20. However, it had recovered to 4.70 as of March 15.

“There are different factors that can affect the movements of ringgit over the short and long-term.

“In the short-term, ringgit performance is mainly affected by cyclical factors, including interest rate differentials, fluctuations in the global economic conditions, and changing investor sentiment,” Abdul Rasheed explained.

“However, in the long-term, ringgit exchange rates are more anchored by domestic fundamental determinants.

“In this respect, Malaysia’s economic fundamentals are sound, as evident from key indicators in 2023 and the projections for 2024,” he added, citing the country’s diversified economy, with a strong external sector resilience and sound financial sector.

As such, Bank Negara’s assessment was that the ringgit was currently “undervalued”.

“Looking ahead, financial markets expect the ringgit to appreciate further into 2024 and continue on an appreciating trend as the effect of global factors subside,” Abdul Rasheed said, noting that some analysts had even projected that the ringgit would continue strengthening further into 2025.

“This is supported by a number of factors: A reduction in the US policy rate during the year is expected to ease the pressure on the ringgit and other currencies.

“In addition, the recovery in the growth of regional countries is also expected to increase inflows into the region, benefiting Malaysia and the ringgit,” he explained.

Furthermore, in the domestic market, the favourable economic outlook and the implementation of structural reforms were expected to provide support to the ringgit.

“Nevertheless, we remain vigilant of factors that could increase the risk of a decline in the ringgit, such as China’s slow growth momentum and moderation in global commodity prices,” he said.

Meanwhile, Bank Negara expected headline inflation to average between 2% and 3.5% this year, as compared to 2.5% in 2023. The wider forecast range for 2024 was to account for some upside impact on inflation from the implementation of subsidy rationalisation.

The central bank’s overall inflation outlook remained highly subject to upside risks from both domestic policy factors and external forces.

“Domestically, upside risk to the inflation outlook mainly stems from the impact of the implementation of domestic policy on subsidies and price controls.

The overall impact on inflation would be dependent on the magnitude and timing of fuel price adjustments, as well as any additional mitigating measures such as targeted cash transfers.

“Externally, continued pressures from the exchange rate and risks to global commodity prices could fuel additional cost-push inflation.

“Nonetheless, weaker-than-expected global growth conditions could lead to more subdued global commodity prices, which would place downward pressure on domestic inflation,” he added.

According to Abdul Rasheed, the impact of reform measures such as subsidy rationalisation on inflation would likely be temporary.

Therefore, monetary policy intervention would not be necessary to address the potential impact from such measures.

“The effects of these policies, including the subsidy rationalisation, will be assessed to discern the short-to-medium term impact on domestic inflation and growth,” he said.

Beyond domestic policies, he noted, the Monetary Policy Committee (MPC) would be mindful of other potential risks to domestic inflation and growth prospects, including from global factors.

Bank Negara has kept the overnight policy rate (OPR) unchanged at 3% since last July.

“Monetary policy decisions will remain guided by the MPC’s assessment of the balance of risks to domestic inflation and economic growth outlook,” Abdul Rasheed said.“For 2024, monetary policy remains focused on maintaining price stability to facilitate sustainable economic growth,” he added.

Bank Negara projected that economic growth would improve to between 4% and 5% this year, supported by continued expansion in domestic demand and recovery in exports, following a moderate expansion in gross domestic product (GDP) of 3.7% in 2023.

“Growth will be driven by household spending, which is underpinned by higher income growth and continued expansion in employment,” he said of the 2024 GDP outlook.

Despite subsidy rationalisation, Bank Negara projected that household spending would expand at a faster pace of 5.7% in 2024, as compared to 4.7% last year.

In addition, the central bank noted that improved investment growth, projected at 6.2% in 2024 from 5.5% last year, and recovery in exports to an expected growth of 4% in 2024 from a contraction of 7.9% in 2023, would also support GDP growth this year.

“Investment activities will be lifted by new and ongoing multi-year projects by both the private and public sectors, as well as implementation of projects related to the national master plans.

“The external sector was expected to benefit from the rebound in global trade and technology upcycle.

“Higher tourist arrivals and spending will also provide additional impetus to our growth,” he added.
Economy,BNM,RinggitStability,StructuralReforms,USInterestRates,GrowthProjection,HeadlineInflation,SubsidyImpact
While Bank Negara remains committed to playing its part in preserving confidence in the ringgit, it reiterates that structural reforms are still key to the long-term strengthening of the local currency.