KUALA LUMPUR: BMI Research has upgraded ringgit end-year forecast to RM3.90 against the US Dollar from RM4 previously driven by optimism about the currency outlook.
The forecast is also supported by Malaysia’s improving fiscal position, positive growth outlook, and still-undervalued real effective exchange rate.
The research firm said the ringgit continues to look technically bullish following the sustained break of resistance in December 2017.
"We expect the currency's longer term appreciatory trend to remain intact amid an improving fiscal position, positive growth outlook, and still-undervalued real effective exchange rate,” it said in a note.
BMI views the government's commitment to reducing the budget deficit further in its 2018 budget as positive for the currency.
Despite 2018 being an election year, the government has sought to strike a balance between election-related spending and continuing to reduce the deficit through targeted spending and ongoing efforts to strengthen tax collection and compliance, the research firm said.
"As such, while the currency appears to be pricing in a sharp rise in inflation, we do not expect this to happen given the government's ongoing efforts to achieve a balanced budget over the longer term,” it said.
This will provide room for the currency to gradually strengthen over the longer term, it added.
BMI said Malaysia's positive growth outlook compared to that of the US is likely to be supportive of the Ringgit over the coming quarters.
“We forecast Malaysia's real GDP growth to average 5.3 per cent from 2018-2019 amid an improving business environment as the government seeks to improve the efficiency of the bureaucracy to further reduce red tape and strengthen Malaysia's operating environment,” it said.
In addition, continued investments in infrastructure, especially rural infrastructure, will be positive for improving the connectivity of the country and lend support to construction, it added.
This is in contrast to our forecast for real GDP growth in the US to average 2.1 per cent over the same period, BMI said.
Despite appreciating by 7.8 per cent in 2017, BMI said the real effective exchange rate (REER) remains cheap by historical standards while the country continues to strengthen its external accounts.
“Malaysia continues to build its foreign reserves, which stood at USD98.4 billion in November 2017, picking up from the lows of USD89.4 billion in 2015,” it said.
This, in addition to its positive net international investment position (NIIP) should provide support for Malaysia's external competitiveness over the medium term as the country is less susceptible to portfolio outflows, it added.