Southeast Asian city-state warns of rise in ‘downside risks’ amid rising interest rates, escalation of war in Ukraine.
RHB Research has raised an alarming prediction for the Malaysian ringgit. It suggests that the currency may soar to RM5.00 against the US dollar in the medium-term, sending shockwaves through the nation’s economy.
This worrisome forecast comes as the initial short-term target of 4.60 was surpassed today, leading to a revised near-term target of 4.70, with a potential print at RM4.75.
The balance of risks for RHB Research’s end-2Q’2023 projection of 4.55-4.65 now leans towards the higher range of 4.65-4.75, it said in a report today.
More significantly, the firm does not rule out the possibility of the USD-RM exchange rate hitting the significant milestone of 5.0 in the medium term.
Several factors contribute to the relentless upward momentum of the USD-RM pair.
The negative carry on holding the ringgit is expected to increase as the Bank Negara Malaysia falls behind the currency market and inflation curve.
Additionally, market expectations of US Federal Reserve Bank (FED) Federal Funds Rate (FFR) hikes continue to rise, with a potential 25 basis points hike at the upcoming June 15 FOMC meeting, further impacting the currency.
Furthermore, dwindling domestic sentiment towards the ringgit is evident through low trading volumes in the domestic stock market and indications of capital flight to alternative assets platforms.
Moreover, upcoming state-level elections may result in limited fiscal and structural reform announcements, posing further challenges for the Malaysian currency.
RHB Research’s USD-RM model indicates that unless significant changes in guidance from the Bank Negara Malaysia and substantial fiscal reforms are announced in the coming months, the USD-RM exchange rate could reach 4.762 by the third quarter of 2023.
The research firm emphasises the crucial need for an interest rate defense of the ringgit by the central bank to stabilize the currency.
However, given the prevailing strong upward momentum, an overnight policy rate (OPR) of 3.75% with hawkish guidance may only be able to stabilise the currency within the range of 4.40-4.60.
It said that the situation reflects a common dilemma observed in emerging markets, where policy responses often lag behind rising fiscal risks and declining domestic confidence in the currency.
