KUALA LUMPUR – The projected repatriation of funds back to the US due to president Donald Trump’s tax overhaul is not likely to affect the ringgit on the back of other favourable factors supporting the currency, economists said.
Sunway Business School Professor, Dr. Yeah Kim Leng said that among the factors that are expected to keep the ringgit strong are Malaysia’s strong gross domestic product (GDP) growth, firming current account surplus, lower inflation, and moderately strong oil price anticipated in 2018 that would be supportive of the ringgit’s underlying strength.
“Despite being among the best performing emerging currencies in 2017, the ringgit remains undervalued and this also provides some buffer against its depreciation “A key headwind against a strong US dollar surge is its current account deficit which would worsen and undermine the dollar strength,” Yeah told Malay Mail.
In addition, the Sunway Business School professor explained that while the weaker ringgit against the US dollar will result in higher imported inflation, the effects are likely to be moderated by the ringgit maintaining its strength against the currencies of its other key trading partners that include China, Japan, Europe and other Asian countries.
Yeah said that only imports from the US will be affected if the ringgit is able to maintain parity with other currencies. Given that imports from the US are not large, the inflationary pressures arising from the ringgit depreciation likewise will not be sizeable.
Commenting if there would be a massive outflow of funds and its impact on the balance of payment (BoP), he said: “Any strain on the BoP due to short-term capital outflows will be temporary and limited due to the depth of the financial markets, projected current account surpluses and declining fiscal deficit as well as the country’s adequate level of foreign reserves and low external debt.
“The interest rate hikes in the US are already built into market expectations although it is noticed that the US yield curve is facing an inversion which some analysts interpret as signalling a recession in one to two years’ time.”
Yeah opined that the huge funds that are likely to take advantage of the US tax changes are largely based in the developed markets.
“The impact on emerging countries including Malaysia is not expected to be large since the foreign funds invested in this region are motivated by risk diversification and exposure to emerging markets risk and opportunities.
“A strong US dollar will favour Malaysian exporters who will find their products more cost-competitive in the US markets,” added Yeah.
Malaysian Institute of Economic Research (MIER) senior research fellow Dr. Zulkiply Omar said that while there will be some downward pressure on the ringgit, stemming from the net outflow of short-term capital, the ringgit will not depreciate that badly because there are other factors that will influence the value of ringgit, especially trade growth. “Global trade is expected to grow healthily next year,” he said.
In addition, Zulkiply explained that tax incentives alone may not be sufficient to encourage US corporations to repatriate their earnings.
“They are still cautious on reinvesting in the US economy as the downside risk factors on economic growth are luring. As a result, the US corporate tax cut will limit the US fiscal space and this will dampen growth.
“However, a stronger dollar will also hurt US exports. Additionally, the uncertainty of Trump policy is still in the spectrum that will weigh down the US economy.
“Meanwhile, a better prospect for the euro area will also cause a diversion in investment and the euro area is expected to normalize its monetary policy,” he said.
Zulkiply also said that the US monetary normalisation policy is expected to have minimal impact on the greenback at least for two reasons.
“Firstly, US economy will be moderating due to a contraction in the monetary policy as the upward pressure on the dollar will also hurt US exports. Consequently, the job market will be on the downward pressure.
“Secondly, policy normalisation in other major economies, particularly the euro area, will somewhat disperse capital movement away from the US,” added Zulkiply.
A report by the Wall Street Journal stated that the tax overhaul could jolt the dollar as corporations could repatriate as much as US$400 billion (RM1.6 trillion) in earnings and cash from abroad.
However, the IQI Global chief economist Shan Saeed told Malay Mail that he disagrees with the amount reported in the Wall Street Journal, saying that corporations are holding US$2.3 trillion in cash abroad and are still trying to fathom the tax cut plan.
“According to the strategic market intelligence report, I don’t see a massive inflow of funds to the US economy in the near future and it is expected that we will not foresee major impact to the Ringgit in the short term of first-quarter (Q1) to Q2 in 2018,” Saeed said.
He opined that the US dollar will depreciate by three to five per cent in the coming months against major global currencies and did not expect any balance of payment issue coming up in the foreseeable future as Malaysian economy is on the upsurge with the average of GDP of over 5.8 per cent.
“Our economic confidence is all times high with strong balance sheet of the government both in political and economic stability. In addition, infrastructure investment is coming to fruition with strong correlation with GDP growth as well as the solid export numbers with growth momentum,” stated the IQI Global chief economist.
Saeed forecasts stable ringgit appreciating nine per cent year-to-date against US dollar, where ringgit will be trading between 3.75 and 4.25 versus the dollar in 2018.
He also said that the higher oil price which is expected to remain between US$60 to US$87 per barrel in 2018 will boost the fiscal side of the government’s balance sheet.
– Malay Mail