The ringgit will rally to reach 2.92 against the greenback next year, possibly its strongest since it was de-pegged in 2005, buoyed by healthy capital inflows and strong fundamentals, according to Nomura economists.
After dipping a shade below RM3 this year, the local unit is now trading at RM3.04.
Nomura Singapore Ltd executive director and economist, Southeast Asia Euben Paracuelles said capital inflows would continue to find their way into Asia next year away from the economically-troubled West.
According to Nomura International (HK) Ltd chief economist for Asia ex Japan Rob Subbaraman, Asia attracted foreign capital flows totalling US$573bil in the first five years before the global financial crisis of 2008.
However, in the first two-and-a-half years alone since the crisis, capital inflows into the Asian region had reached US$783bil, he told a media briefing yesterday.
As Asian currencies appreciate, this may hurt exports. This was where central banks would have to intervene in order keep things orderly, said Subbaraman.
Nomura is expecting Malaysia to continue to grow next year but at a slower pace of 4.3% compared with 5.3% this year largely due to weak external demand and as the Government undergoes fiscal consolidation after the general elections, which it expects to take place in March.
“Fiscal policy had buoyed growth for two years” and as a result public debt had risen from 39.8% of gross domestic product (GDP) in 2008 to 51.8% in 2011, suggesting that fiscal consolidation post-elections should be significant, said Paracuelles.
While the Government aims to reduce the fiscal deficit to 4% of GDP from 4.5% this year, Nomura thinks this is “ambitious” as it implies a negative fiscal impulse and is based on high GDP growth assumptions (4.5% to 5.5%).
It is forecasting a fiscal deficit at 4.5% of GDP.
Headline inflation would average 2.4% next year higher than 1.7% this year following minimum wage hikes, higher cost push pressures and modest subsidy adjustments, the research house said, adding that in view of this, it was expecting Bank Negara to hold interest rates in the first half of next year before raising it by 50 basis points in the second half, taking it to 3.50%.
Amid expectations that Asian economies would remain resilient next year supported by robust domestic demand and buoyed by demand from a still-growing China, the region risked overheating their economies with central banks finding themselves behind the curve in tackling such credit booms, Nomura said.