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KUALA LUMPUR: The ringgit is expected to be the best performing currency in Asia against the US dollar in 2024 alongside Japan’s yen on the back of improving economic fundamentals, a potential narrowing of the interest rate differential, projected US Federal Reserve rate cut, as well as Malaysia’s commitment to fiscal consolidation, according to Affin Bank Bhd.

Affin Bank group chief economist Alan Tan Chew Leong said that because of improving economic fundamentals, it expects Malaysia and Japan to enjoy appreciation in their currencies in 2024.

“We think the sharp turnaround after the yen depreciated by 7% against the US dollar, ringgit 4.1%, these two currencies will be the outperformers in 2024. Why? Because the economic fundamentals of these two countries in 2024 will be a lot stronger,” he said during the Affin Group media briefing titled “Macro Economics Outlook 2024” yesterday.

Looking at Malaysia’s economic fundamentals, Tan explained, there are two things that stand out – one is a strong current account surplus, and as for some other countries in the region, their current account surplus falls into deficit.

“Even in certain quarters, these countries in the region are facing twin deficits, both fiscal deficit and current account deficit. But for Malaysia, our economic fundamentals have always remained strong because of our current account surplus position, and it has always been in the surplus,” he said.

Another important factor is the interest rate differential that resulted from the sharp increases implemented by the US Federal Reserve, Tan said, adding that the gap between US and local rates widened, and that led to some capital outflows.

The forecast for the US federal funds rate in 2024 suggests the possibility of the first cut in September, bringing it down to 4.5%. Some US economists even anticipate more aggressive rate cuts starting from June. Meanwhile, Bank Negara Malaysia is expected to maintain the overnight policy rate at 3% in its Monetary Policy Committee meeting on Jan 23 and 24, with the flexibility to maintain it at that level throughout 2024.

“In this scenario, the interest differential between the US rate and the local rate is expected to narrow, positively impacting ringgit sentiment. This narrowing of the interest differential is likely to contribute to the improvement of the ringgit in 2024,” remarked Tan.

He said real effective exchange rates reveal that Malaysia’s and Thailand’s currencies are undervalued compared with Indonesia’s rupiah and the Philippine peso, signalling a potential uptrend.

“Because of the economic fundamentals improvement that we are expecting for Malaysia this year, we think that the undervalued ringgit will also improve going into the second half of 2024,” he added.

One of the key reasons, Tan said, is the government’s firm commitment towards fiscal consolidation. He expects the government to bring down the fiscal deficit from 5% to 4.3% of gross domestic product this year, and to reduce it to 3.0-3.5% by the end of 2025.

The other point to note is that from the 1980s to now, Malaysia’s government revenue has always been strong enough to cover operating expenditure.

Tan said this trend will likely continue into 2024 and beyond, where the government’s revenue will be strong enough to cover operating expenditure.

On the fiscal deficit side, assuming a scenario where the government continues to maintain fiscal discipline and aiming to correct the fiscal deficit target to 3.0-3.5%, he said, the country may even see a positive upgrade by sovereign rating agencies.

“And this is important because in certain years S&P and Fitch like in 2020 had Malaysia’s outlook as negative,” he said.

In a nutshell, Tan said, a turnaround is expected, especially after the ringgit’s 4.1% depreciation against the US dollar in 2023.

“From a macro perspective, we see the ringgit turning more positive into 2024 partly because of its weak performance in 2023 compared to regional currencies such as the rupiah, baht and peso. And similarly, when we compare it to the yen and renminbi, the ringgit has also depreciated,” he added.