KUALA LUMPUR: The ringgit's performance against the United States (US) dollar alone is not a reflection of the state of the economy and is only one indicator among many, Bank Negara Malaysia's (BNM) Governor Tan Sri Nor Shamsiah Mohd Yunus said.

"It is important to consider the strength and positive performance of the Malaysian economy. Growth is robust, the labour market is healthy and the financial system is resilient and continues to perform its role effectively," she said at the Khazanah Megatrends Forum 2022 here today.

She was delivering her speech titled "Navigating Malaysia's Economic Transition in a post-COVID world" at the forum.

The governor said Malaysia has a strong external position with more foreign currency assets than foreign currency liabilities.

"Foreign currency borrowings only account for less than three per cent of total Federal Government debt," she said.

She said although the ringgit depreciated by more than nine per cent against the US dollar since January this year, the strength of the dollar is a global phenomenon and not just a Malaysian one.

"In fact, the US dollar is now at a two-decade high due to aggressive tightening of monetary policy by the (US) Federal Reserve, which increased its policy rate by 300 bps (basis points) this year.

"Risk-off sentiments arising from geopolitical conflict and a moderating global growth outlook have further increased demand for dollar assets," she said.

She said the currencies of other major economies have also depreciated against the US dollar.

"If we also look at how the ringgit has fared against the currencies of our trading partners, it has appreciated against some and depreciated against others," she said.

Furthermore, she said the performance of the ringgit, if weighed against the currencies of Malaysia's trading partners, has been relatively stable.

"This underlines the point that we are in an environment of US dollar strength," she said.



FLEXIBLE EXCHANGE RATE REMAINS RELEVANT

Nor Shamsiah said a flexible exchange rate continued to be relevant as it allowed the country to absorb external shocks.

She said it also allowed the Monetary Policy Committee (MPC) to set the policy rate based on Malaysia's domestic growth and inflation outlook rather than be constrained in having to follow the monetary policy of other advanced economies.

"Now, we know that exchange rate movements create winners and losers. No doubt, the dollar strength will raise the cost of imported goods, including food prices. Imported inputs account for less than 20 per cent of production cost."

"We understand that the increase in prices, especially in food prices, are a concern for many. And although the exchange rate impact to inflation is not one to one, it partly contributes to the rising cost of living as higher commodity prices and supply disruptions affect domestic prices," she said.

Nevertheless, she said various measures are being implemented to lessen the impact of the increase in prices, including social assistance, stabilisation of prices and access to discounted necessity goods.

Meanwhile, she said the ringgit depreciation is also expected to benefit export-oriented sectors, which employed more than 30 per cent of the Malaysian labour force.

"In fact, Malaysia's exports have increased by 30 per cent this year supported by several factors, including exchange rate valuation gains," she said.

She said the acceleration in export growth has, to some extent, contributed to higher job creation and increase in wages.

"This shows that it is important that we have a diversified economy that helps to mitigate external shocks," she said.

She said it is also important to preserve orderly financial market conditions by avoiding large swings in the exchange rate so as not to disrupt economic activities.

"This will enable the exchange rate to serve as a shock absorber, not a shock amplifier, to the domestic economy," she said.

The governor said although BNM does not target any level of the exchange rate, it would closely monitor and ensure orderly market conditions.

"On this, I should highlight that even with heightened volatility in global financial markets, daily onshore foreign exchange transaction volume and bond market activity remain healthy," she said.

She added that reforms to deepen the domestic bond market has helped to strengthen the fundamentals of the economy by enabling businesses to meet their funding needs more effectively.

At 1.37 pm, the local currency stood at 4.6485/6515 against the greenback from 4.6400/6445 at the opening this morning.

-- BERNAMA