This year, the Malaysian government has intensified its efforts to attract foreign direct investments (FDIs), implementing new policies and incentives related to the Johor-Singapore Special Economic Zone and the Forest City Special Financial Zone (SFZ).
According to the Malaysian Investment Development Authority, the country recorded an 18% y-o-y increase in “approved investments” to RM160 billion ($49.4 billion) in 1H2024, of which foreign investments accounted for 53.4% of the total at RM85.4 billion. In the Malaysian context, an “approved investment” generally refers to an investment that has received official approval or recognition from the relevant government authorities or agencies.
Austria led the foreign investment contributions at RM30.1 billion, followed by Singapore (RM16.05 billion), China (RM9.8 billion), the Netherlands (RM4 billion) and Taiwan (RM2.4 billion).
The rising FDI into the country may have been one of the contributors to the ringgit’s outperformance — increasing FDI inflow escalates the demand for the local currency as foreign investors convert their funds to invest in local projects, boosting its value. This also signals confidence in the economy, attracting more investors and speculators. Additionally, higher FDI improves the country’s foreign exchange reserves and balance of payments, further strengthening the local currency.
BMI Research analysts believe the resilient FDI inflow would continue to be supportive of the ringgit, noting that as a share of GDP, net FDI inflows into Malaysia have consistently surpassed that of its regional peers such as Thailand and Indonesia. They add that the country’s policymakers have offered reduced income tax rates for foreign workers and concessionary corporate tax rates to attract global firms, as well as other incentives at the Forest City SFZ. These initiatives, which are set to kick in in 1Q2025, will act as a further boost to FDI.
The ringgit’s outperformance is also driven by the US Federal Reserve’s move to lower its benchmark interest rate by a larger-than-expected 50 basis points on Sept 19. Following the announcement, Asian currencies hit a 14-month high, following months of speculation and anticipation of the rate cut.
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Other factors pushing the ringgit rally include global funds being invested in Malaysian stock and supportive fiscal reforms, such as subsidies retargeting. Analysts have also attributed the currency’s strong performance to Prime Minister Anwar Ibrahim’s stable leadership, which provided investors with much-needed respite. In Singapore, companies with a presence in Malaysia and Indonesia could benefit as their currencies strengthen against the Singapore dollar.
In February this year, during a results briefing, UOB’s group CFO Lee Wai Fai said the bank has to balance demand for loans versus margins. “Higher for longer is resulting in a strong US dollar and has some implications for the region,” Lee said as the baht and ringgit weakened. The concern was regional growth would be negatively impacted as money flowed to the US. “We are just balancing interest rates and how they will affect domestic growth,” he said.
The converse is likely to be the case with FDIs flowing into Malaysia and a strengthening ringgit. UOB is expected to benefit from gains in translation and from GDP growth as it is the largest foreign bank in Malaysia.
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At press time, the ringgit is up 7.32% against the Singapore dollar ytd. Analysts believe that the ringgit is poised to sustain its strength due to narrowing yield differentials with the US and a relatively resilient growth outlook, which will bode well for the currency. Compared to the US dollar, the ringgit surged to a high of RM4.12 in late September. This is from the year’s low of RM4.80 on Feb 20.
While the Singdollar has also seen strength against the greenback, it may not perform in line with other Asean currencies as, unlike the latter countries, Singapore uses an exchange rate-based monetary policy, where the Monetary Authority of Singapore actively manages the Singdollar against a basket of currencies, including the US dollar, to maintain price stability and competitiveness.
Singaporeans may find that the items they usually buy across the causeway cost more now compared to before. Analysts at BMI, Maybank Securities, MIDF Research and AmInvestment Bank see the ringgit ending the year at RM4, RM4.25, RM4.20 and RM4.63 against the greenback, respectively. In comparison, Bloomberg’s consensus forecast by year-end is RM4.30 per US dollar.
BMI analysts continue to be optimistic for the longer term, forecasting the ringgit to strengthen and reach RM3.55 against the greenback by the end of 2025.
