The strengthening of the Malaysian ringgit isn't just a fleeting phenomenon but rather a reflection of deeper structural dynamics.
The ringgit's rise can be attributed in part to Bank Negara Malaysia's (BNM) effective management of inflation, creating a stable and attractive environment for foreign investment.
In addition, strategic initiatives like the National Energy Transition Roadmap (NETR) have positioned Malaysia as a key destination for energy-demanding sectors such as data centres, which require both reliable infrastructure and competitive energy costs.
These structural improvements have bolstered investor confidence and helped strengthen the ringgit.
However, the global financial landscape cannot be ignored in understanding the ringgit's appreciation.
Emerging markets like Malaysia are closely linked to the monetary policy decisions made by the U.S. Federal Reserve.
The adage "when the U.S. Federal Reserve sneezes, emerging markets catch a cold" highlights how interconnected these markets are.
When the Federal Reserve raises interest rates, capital tends to flow out of emerging markets like Malaysia and back to the U.S., where investors seek the safer, higher returns of U.S. bonds.
Conversely, when the Fed pauses or slows its rate hikes, countries like Malaysia become more attractive to investors, offering higher yields and better returns due to their relatively higher interest rates.
This dynamic is critical because it explains why short-term capital, or "hot money," often flows into Malaysia during periods when U.S. rates are steady or declining.
Local bonds and shares become more appealing to foreign investors, and this inflow of capital strengthens the ringgit.
However, these gains are transient and can disappear as quickly as they arrive, especially if global monetary conditions shift again.
This type of capital flow is highly sensitive to changes in liquidity and investor sentiment, and while it temporarily supports the currency, it doesn't build long-term economic resilience.
The real engine for Malaysia's sustainable economic growth lies in Gross Fixed Capital Formation (GFCF), which represents long-term investments in physical assets such as industrial centres, machinery, and infrastructure.
Unlike the volatile nature of portfolio investments in bonds and equities, GFCF creates the foundations of an economy by enhancing industrial capacity, creating jobs, and driving sustainable productivity growth.
These investments are the "bones" of the economy, providing a steady base that can weather both good times and bad.
Portfolio investments, such as bonds and equities, are more fluid and subject to the whims of global markets, influenced by factors like monetary policy shifts and market liquidity.
While they contribute to short-term currency appreciation and stock market gains, they are not a reliable source of long-term growth.
These financial assets are prone to sharp price movements, abrupt jumps, and volatility, making them less dependable than GFCF for sustained economic development.
Moreover, exchange rates, bond yields, and equity prices tend to move in tandem, driven largely by liquidity conditions and investor sentiment.
When investor confidence is high and there are net inflows into the bond and equity markets, the ringgit appreciates.
However, these movements are short-lived if they are not backed by real economic growth through GFCF.
The relationship between the financial markets and the currency market is fluid, and while strong investor sentiment can temporarily boost the ringgit, the long-term value of the currency will depend on Malaysia's ability to generate real, productive investment in physical infrastructure and industry.
In essence, Malaysia must focus on balancing short-term financial inflows with long-term investments that will ensure sustained economic growth.
The strengthening of the ringgit is a positive sign, but it is crucial that the country doesn't rely solely on portfolio investments, which are volatile and transient.
Instead, Malaysia should continue to attract and realise GFCF, building the infrastructure and industrial capacity needed to secure long-term economic stability and prosperity.
This will provide the economic "muscle" to navigate both favourable and challenging times, ensuring the country remains competitive and resilient in the global economy.
Developments in the Middle East
At the time this analysis was written, the world was watching the unfolding events in the Middle East with growing concern.
The potential fallout from escalating tensions—particularly how they might affect oil prices and global stock markets—was still unclear.
As we know, in our interconnected global economy, a flare-up in one region can send ripple effects far beyond its borders.
A spike in oil prices could alter everything from inflation rates to consumer spending, and the financial markets would inevitably react.
But as of now, those variables have not yet been factored into this particular analysis.
Ceteris paribus—everything else being equal—this piece reflects a moment in time before those developments are fully played out.
While it's impossible to predict the future with certainty, it's worth noting that these geopolitical tensions could change the game entirely, reshaping the economic landscape in ways that are difficult to foresee.
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Economist Samirul Ariff Othman is an adjunct lecturer at Universiti Teknologi Petronas, an international relations analyst, and a senior consultant with Global Asia Consulting. He has background as a senior researcher at the Malaysian Institute of Economic Research.