Bank Negara Takes Action to Stabilize Forex Market

Assistant Governor Adnan Zaylani has stated that Bank Negara Malaysia (BNM) will take measures to stabilize the Malaysian ringgit in the foreign exchange market and prevent excessive currency fluctuations. The intervention aims to maintain stability in the currency's value.

The Malaysian ringgit is currently trading close to its lowest level in seven months, with the exchange rate quoted at 4.6663 against the US dollar, showing a 0.2% increase at 5:46 pm.

In accordance with its statutory mandate, Bank Negara Malaysia (BNM) will take action in the foreign exchange market to counter excessive currency movements. While the value of the ringgit remains determined by market forces, BNM expects that the government's ongoing measures to strengthen the economy will contribute to a better alignment of the ringgit with the country's fundamentals, as stated by Assistant Governor Adnan in a statement.

Despite the impact of global events on the ringgit, Malaysia's projected economic growth of 4.0% to 5.0%, along with the government's efforts in implementing structural reforms and fiscal consolidation, serve as supporting factors for the ringgit, according to Adnan.

According to the central bank, the recent decline in the value of the ringgit does not accurately reflect Malaysia's economic fundamentals, and the level of volatility experienced is higher than historical patterns would suggest.

The central bank highlighted that external factors continue to be the primary driver of the ringgit's performance, particularly the evolving market expectations of higher interest rates in major economies. This, in turn, increases the risk of a significant slowdown in the global economy.

Additionally, the People's Bank of China (PBOC) has reduced interest rates due to signs indicating a loss of momentum in China's post-Covid economic recovery. These developments have had a negative impact on the ringgit, as well as other currencies in the region.

Given the strength of the US dollar, the Financial Markets Committee (FMC) acknowledged that the recent depreciation of the ringgit is not in line with Malaysia's economic fundamentals.

The Financial Markets Committee (FMC) identified several factors that led to the view that recent fluctuations in the ringgit exchange rate were excessive:

i. Despite a more moderate growth level expected in 2023 compared to the remarkable GDP growth in 2022, Malaysia's economy is projected to maintain its momentum. This is supported by ongoing domestic investment activity, improvements in the labor market, and increased tourism. Malaysia's diverse economic structure is expected to mitigate the impact of global economic slowdown.

ii. While the close relationship between the ringgit and the renminbi can be attributed to Malaysia's significant trade ties with China, it is important to recognize that Malaysia's external sector is diversified, encompassing various product segments and trading partners. The FMC noted that this diversity should help moderate the close co-movement between the ringgit and the renminbi.

iii. The FMC observed that while ringgit volatility has increased along with other regional currencies, the extent of the volatility spikes has been disproportionately higher and deviated from historical patterns. However, the onshore financial markets remain stable, with the ringgit's forex volatility ranking the lowest among regional peers. This stability is supported by consistent growth in daily forex turnover volumes, averaging US$15.1 billion year-to-date.

iv. In the bond market, non-resident holdings of Malaysian Government Securities (MGS) bonds have remained close to the long-term average of 23.5%. Notably, MGS bonds continue to offer positive real yields, and foreign investors have shown sustained interest in the Malaysian bond market.

Chu Kok Wei, President of the Financial Markets Association of Malaysia, expressed support for the guidance provided by the central bank (BNM) regarding the ringgit and recent market developments. He emphasized that Malaysia's financial markets continue to operate in an orderly manner, remaining conducive to fulfilling clients' needs. The financial community remains supportive of BNM's efforts in the domestic markets.