Malaysian Ringgit: Political risks rise as fundamentals hold firm – MUFG

MUFG’s Lloyd Chan highlights that Malaysia’s solid growth, low inflation and prudent policy are supporting the Ringgit, but rising domestic political risks could drive USD/MYR in coming months. Despite strong external demand and contained inflation, state election outcomes and coalition dynamics may add a risk premium to the Ringgit and trigger temporary weakness.

Ringgit supported but politics key

"The combination of high US yields, geopolitical risks in the Middle East, and rising domestic political risks are putting some near-term downward pressure on the ringgit. While our base case is for the Middle East conflict to be contained rather than developing into a full-blown regional war, oil supply disruptions could keep inflation concerns alive globally and delay Fed easing. Indeed, tanker flows through Hormuz have collapsed after the June ceasefire Memorandum of Understanding between US and Iran collapsed early this month."

"However, we look for ringgit weakness to be contained, given Malaysia's supportive growth backdrop, contained inflation, strong external sector, and prudent policymaking, which should help prevent disorderly currency depreciation."

"From a currency perspective, authorities have also demonstrated a willingness to smooth recent excessive FX volatility. Similar to measures implemented in 2024, we expect continued efforts to encourage export conversion and repatriation flows by government linked corporates should the ringgit come under excessive pressure."

"While economics remains supportive, domestic political developments could become a more important driver of USD/MYR over the coming months. Political uncertainty surrounding state elections, party coalition dynamics, or speculation around the timing of a future general election could generate periods of temporary ringgit weakness. Following the Johor state election on 11 July where the ruling PH coalition party has a poor showing, the upcoming Negeri Sembilan state election on 1 August will serve as a key political signal."

"Heightened election and political uncertainty could introduce a higher risk premium on the ringgit."