Nomura International (Hong Kong) Ltd’s chief economist for Asia ex-Japan Robert Subbaraman expects the ringgit to continue strengthening to hit RM2.80 against the US dollar by 2012 — a level not seen in 13 years.
In a media briefing yesterday, Subbaraman said he had to review the initial year-end target of RM3.18 for 2010 and RM3.10 for 2011 after considering the unexpectedly sharp appreciation of the currency recently. Yesterday, the ringgit climbed to new 13-year high of RM3.0835 versus the greenback.
Barring any unforeseen external shocks to the domestic economy, Subbaraman said sustainable economic growth, an expected rise in interest rates and strong economic fundamentals would continue to lend support to the ringgit, as well as other Asian currencies. He believes that the US dollar is on a decline, particularly against the Asian currencies.
The strong ringgit will attract an inflow of foreign money into the country. Subbaraman is of the opinion that too much inflow of foreign funds might not be good for an economy; the Asian financial crisis was evidence of that. Nevertheless, it is too early a concern at this time, he added.
Subbaraman, who is optimistic on the emerging economies, especially Asia, expects Malaysia’s GDP growth will exceed the official forecast of 6% by expanding to 7% this year.
Subbaraman. Photo by Haris Hassan
“We are optimistic… the Malaysian economy will over-achieve the official target,” he said. However, he foresees the growth momentum to slow down to 5.2% next year and 5.5% in 2012.
Subbaraman shares the consensus view that economic growth will decelerate in the second half of this year due mainly to a slowdown in exports as inventory building near the tail end.
He said the biggest challenge for the domestic economy is getting out of the middle-income trap to transform into a high-income economy.
He explained that there was an acute need to boost investments in order to propel the country into high-income status. “Malaysia should find ways to increase private and foreign investments. It needs to create an environment that is attractive for foreign investments.”
“It should be a level playing field for whoever comes to invest here,” he added.
Liberalisation of the capital market and access to financing for smaller companies were also vital areas for policymakers to focus on.
Commenting on the likelihood of a double-dip recession, Subbaraman believes there is a one in five chance of happening. “It is not insignificant. We cannot rule out the possibility of unforeseen shocks,” he said.
Nevertheless, the consolation for Asia is that policymakers can still afford more fiscal stimulus to counter any slowdown that may happen, Subbaraman said
In terms of the impact of a double-dip recession on Malaysia, he warned that our economy could be “hit hard” again due to its high exposure to exports. “[If that happens], Malaysia’s GDP growth would be at 3.8% for 2011, instead 5.2%.”
Subbaraman expects Bank Negara Malaysia to start raising interest rates as early as 1Q2011; he anticipates three hikes next year. “We expect the interest rate to be at 3.5% by end-2011.”
Subbaraman acknowledged that the central bank had stopped raising interest rates for the time being, which he views as the right move. He said the strengthening ringgit had eased the need to raise interest rates in the immediate term.
This article appeared in The Edge Financial Daily, September 30, 2010.
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