What’s behind the Malaysian ringgit’s strength in 2024?

The Malaysian ringgit (MYR) has experienced a significant turnaround in 2024. Currently, the U.S. dollar (USD) to MYR exchange rate stands at 4.12, an unusual level for the MYR, which traditionally tends to depreciate against the USD. This recent surge in strength is not attributable to a single factor but is instead the result of a combination of domestic and international developments that have positively influenced the currency. This article will explore the potential drivers behind the MYR’s performance and analyse its implications for the Malaysian economy.

Factors contributing to MYR strength

1. U.S. interest rate cuts

One of the most significant external factors influencing the MYR’s performance has been the shift in U.S. monetary policy. The U.S. recently announced its first rate cut in four years, bringing the interest rate down to a range of 4.75% to 5%. It appears that this will not be the only rate cut by the Federal Reserve, as recent forecasts indicate an expected drop to around 4.4% by the end of 2024 and further to 3.4% by the end of 2025. Typically, such rate cuts weaken the U.S. dollar relative to other currencies. Consequently, this anticipated shift has made the MYR more attractive to local investors seeking higher yields.

Moreover, the potential rate cuts in the U.S. have led to increased capital flows into emerging markets, including Malaysia. Historically, emerging markets and the USD have exhibited a negative correlation. This influx of foreign capital has further strengthened the ringgit’s position in the forex market.

2. Foreign investment inflows

Building on favourable global economic conditions, Malaysia saw a substantial increase in foreign direct investment (FDI) throughout 2024. In early March 2024, Malaysia Prime Minister Datuk Seri Anwar Ibrahim announced that Malaysia had successfully attracted potential foreign investment amounting to MYR 76.1 billion. As a result, various multinational companies have announced their future investment plans in Malaysia. The table below provides a summary of some of these companies and their respective investment amounts. Notably, the surge in FDI is particularly concentrated in industries like data centres, cloud computing, and AI.

The influx of foreign capital not only strengthened the MYR but also provided a boost to the overall Malaysian economy. As international companies set operations or expanded their presence in the country, it created a positive feedback loop, further enhancing investor confidence in the Malaysian market.

3. Malaysia’s economic growth

Besides the increased foreign investment, Malaysia’s economy also demonstrated robust growth in 2024. The country’s Q2 2024 gross domestic product expanded by 5.9% (beating Bloomberg consensus’ median forecast of 5.8%), and the figures have consistently outperformed expectations for two straight quarters in 2024, showcasing the resilience and dynamism of Malaysia’s economy.

This economic expansion was particularly impressive compared to regional peers, positioning Malaysia as a standout performer in Southeast Asia. The solid economic fundamentals underpinned investor confidence and contributed significantly to the ringgit’s appreciation.

4. Central bank intervention – repatriation of funds

Bank Negara Malaysia has encouraged government-linked companies and government-linked investment companies to repatriate their overseas profits back to Malaysia. This initiative has significantly increased demand for the ringgit, as these entities convert their foreign earnings into local currency. As the MYR continues to strengthen, there is growing motivation for companies to repatriate and convert their foreign earnings, helping them mitigate potential losses from local currency appreciation. This creates a positive feedback loop, further reinforcing the ringgit’s value. The resulting inflow of funds not only strengthens the MYR but also underscores the government’s commitment to bolstering the domestic economy.

5.Improved political stability

As Malaysians, we can feel that the year 2024 marked a period of enhanced political stability, which also played a crucial role in boosting investor confidence. The country witnessed a more cohesive government and policy-making environment following years of political uncertainties. Prime Minister Anwar Ibrahim and Minister of Investment, Trade & Industry Malaysia, Tengku Zafrul Aziz, have made consistent efforts to attract potential investments through overseas visits, which have played an indivisible role in Malaysia’s economic growth.

This improved political landscape translated into more consistent and business-friendly economic policies. As a result, domestic and international investors showed an increased willingness to commit long-term capital to Malaysian markets, further supporting the ringgit’s strength.

Implications of a stronger MYR

The appreciation of the MYR has brought several benefits to the Malaysian economy. Firstly, it has effectively increased the purchasing power of Malaysians for imported goods and services. This enhanced buying power can lead to lower inflation rates, as the cost of imported items drops in local currency terms. Hopefully, we can finally buy a cheaper iPhone. Additionally, a stronger MYR has enabled Malaysian companies to acquire foreign assets or technologies at lower costs, potentially fueling innovation and boosting competitiveness across various sectors.

However, the strengthening of the MYR also presents challenges, particularly for Malaysia’s export-oriented industries. As the ringgit appreciates, Malaysian exports become relatively more expensive in international markets, potentially affecting their competitiveness. This situation raises concerns for key export sectors such as electronics, palm oil, and manufactured goods, where companies face mounting pressure to maintain market share while contending with the currency’s appreciation.

The fifth perspective

The remarkable performance of the Malaysian ringgit has been driven by a combination of domestic and international factors. While this strengthening boosts purchasing power, it also poses challenges to Malaysia’s export-oriented economy. The benefits and drawbacks of a stronger MYR could potentially reshape various sectors within the Malaysian economic landscape.

Looking forward, the MYR’s trajectory will likely hinge on Malaysia’s ability to sustain economic growth, attract increased FDI, and adapt to global economic shifts or unforeseen factors. A pressing question on many minds is: Will we see the USD/MYR reach 1:4 soon?