KUALA LUMPUR (Oct 14): Despite rising optimism that Malaysia’s ringgit could chart a firmer path next year, economists cautioned that external risks — including slowing regional exports, the US Federal Reserve’s policy direction and China’s economic momentum — remain key factors influencing the currency’s performance.

According to Bloomberg data, economists from eight research houses projected the ringgit to trade around 4.125 against the US dollar by end-2026, suggesting a potential 2.5% appreciation from its current level of 4.227. The ringgit has already gained 5.8% year to date, making it the best-performing Asean currency so far this year.

This consensus compares with the more upbeat forecast by Second Finance Minister Datuk Seri Amir Hamzah Azizan, who recently told Bloomberg that the ringgit could strengthen to “just below RM4” over the next 12 months, citing the country’s solid fundamentals.

CGS International Securities economist Ahmad Nazmi Idrus said the ringgit’s direction will depend on several moving parts, namely “the interest rate differential, how much the Fed will cut [rates], whether Bank Negara Malaysia (BNM) moves ahead, the growth outlook and how Malaysia weathers the tariff war”.

While the market is pricing expectations of future US rate cuts and Malaysia to keep rates steady, Nazmi noted that the interest rate gap between Malaysia and the US "is still wide".

“Perhaps after those cuts are done, the ringgit could return to its fair value,” he said.

Optimism in the ringgit coincides with projected growth of more than 4% this year and next, alongside the government’s commitment to fiscal consolidation under the recently announced national budget.

Although economists have flagged debt affordability and revenue growth concerns, the government’s tax expansion measures have helped reduce a reliance on oil-related income at a time of lower oil prices.

In the near term, Maybank Investment Bank (IB) said in a research note that it sees a “prospect of upside surprise in 3Q growth based on July–August 2025 economic indicators.”

“The advance estimate for 3Q2025, to be released soon, will be key to watch,” it added, citing steady production, trade and commodity data tracked by the bank.

Meanwhile, as Malaysia maintains “firm fundamentals, a steady growth outlook, a prudent budget, continued fiscal consolidation and pursuit of economic reforms”, UOB Malaysia senior economist Julia Goh highlighted emerging headwinds in regional trade.

“There is a notable pullback in exports, suggesting that the impact of tariffs is starting to weigh on trade volumes — especially as the earlier front-loading effects fade,” she said. “The dovish bias of regional central banks could also temper investor enthusiasm for Asian foreign exchange.”

Goh noted that alongside the expected weakening of the US dollar next year, the extent of the Chinese renminbi’s strength will be key in determining the ringgit’s path, given their high positive correlation due to the significant trading relationship between the two countries.

China, which represents almost 17% of Malaysia's total trade, saw exports growth in September and imports at a 17-month high to beat market expectations, although concerns remain over long-term outlook should trade tensions kick into high gear.

CIMB Treasury and Market Research similarly cautioned that a setback to the global trade outlook could hamper foreign exchange gains for trade-reliant economies.

“US-China trade tension remains a key risk following US President Trump’s threat of 100% tariffs on Chinese imports on Friday, though he has since softened his tone,” CIMB said. “That said, the stronger yuan fixing by the People’s Bank of China today helps anchor regional currencies, including the ringgit.”

Externally, a moderately softer US dollar trend and sustained recovery in China could generate positive spillover effects for the ringgit, said OCBC Bank foreign-exchange strategist Christopher Wong.

“On the domestic front, robust FDI inflows, continued foreign fund interest and a current account surplus are supportive,” Wong added.