Ringgit likely to return to fair value in 2H17

PETALING JAYA: Standard Chartered Research expects the ringgit to return to its “fair value” in the second half of 2017, instead of first half of 2018.

“In line with this, we recently revised down our USD/MYR forecasts to 4.20 for Q3-2017 and 4.10 for end-2017, ” it said in a report today.

From a valuation standpoint, the research house said the ringgit remains highly attractive and is particularly relevant in an environment where investors, in their search for yield, are settling for assets with stretched FX valuations elsewhere in emerging markets.

“Despite the 4% ringgit rally so far in Q2, the ringgit real effective exchange rate is only a touch above its all-time lows, including the Asian financial crisis; it is also 11% below its 10-year moving average.”

It added that the fundamental backdrop for the ringgit is arguably improving as Q1 GDP growth was the highest in two years, and net foreign direct investment inflows rose to the highest level since 1999.

Standard Chartered Research, which expects the Malaysian gross domestic product (GDP) to grow 4.6% in 2017 from 4.2% in 2016, has lowered its forecast for 2017 current account surplus to 2.4% of GDP from 3.0%, reflecting a slower-than-expected recovery in commodity prices.

Given that palm oil and natural gas prices have fallen since the start of 2017, the research house said the commodity trade surplus is likely to be smaller than previously expected.

Despite reaching a peak of 5.4% growth in Q1, Standard Chartered Research expects growth momentum to slow in the coming quarters, as the reasons that drove Q1 growth – resilient consumer spending, robust demand from China and strong investment – may taper off.

Standard Chartered Research noted as the debt-service ratio for Malaysian households is high at 22% of disposable income, it will continue to weigh on household consumption.

However, it said softer consumer goods imports should support the trade balance, with key downside risk being the return of capital goods imports to the Q1 growth level.

Standard Chartered Research has raised 2017 inflation forecast to 4.0% from 3.6%, as a result of rising food prices due to supply disruptions and higher transport costs.

On the monetary policy, the research house expects the Overnight Policy Rate to remain unchanged at 3% for the rest of 2017.

“We think that Bank Negara Malaysia will look beyond the temporary pick-up in cost-driven headline CPI (consumer price index) inflation. The central bank expects only a mild pick-up in core inflation, a view that we concur with.”