Fitch Solutions Country Risk& Industry Research says that the Malaysian Ringgit is expected to weaken to RM4.20 to US$1 in 2022 from its earlier forecast of US$1 to RM4.10.
However, it says that it retains its 2021 average exchange rate forecast at US1 to RM4.15.
It says that the short-term outlook for the ringgit remains weak due to the still-serious third wave of Covid-19 infections and the fiscal loosening that has and will continue to be undertaken to support the economy in light of the outbreak.
Meanwhile, according to Fitch, the long-term outlook for the ringgit has worsened with hawkish tilts in major central banks around the world, although any downside will be contained by undervaluation in Real Effective Exchange Rate (REER) terms and the stronger economic activity amid shorter periods of containment measures being in place in 2022 versus 2021.
Reviewing the performance of the ringgit, Fitch believes that since it was last updated in June 2021, the ringgit had weakened against the US dollar to trade at RM4.18/USD as of September 24 from RM4.16 on June 23.
The ringgit would continue to face depreciatory pressures over the rest of 2021 from the economic impact of the ongoing third wave of Covid-19 infections.
“The ringgit will also have to continue to grapple with periodic surges in the US dollar and upside risks to US dollar strength after half the Federal Open Market Committee during the September meeting brought forward their expectations for the start of interest rate hikes to 2022 (from 2023 previously) and also growing indications of asset purchase tapering beginning in the coming months,” Fitch says
It says that despite the government’s plan to reopen the economy fully and treat Covid-19 as endemic by the end of October 2021, it does not expect any such opening to be sustainable for the long term as evidenced by the experience of neighbouring Singapore, which has a higher vaccination rate and has still struggled to sustain a reopening amid a resurgence in cases led by the Delta variant.
Malaysia is likely to be worse hit by a resurgence of infections once it reopens with cases remaining well above 10,000 daily as of the time of writing on September 27, 2021. “The country’s healthcare system is unlikely to be able to weather the pressure it will come under once a full reopening is implemented, Fitch says.
Fitch also says that further ahead in 2023, it would expect that the pandemic would have been brought under better control, or that the economy would have worked out a better and more effective way to co-exist with Covid-19, such that it can further stabilise compared to 2022 and 2021 and it forecast a slightly stronger average ringgit at RM1 to USD 4.15.
