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Friday, September 4, 2015, 11:32

Ringgit takes a dive amid multiple woes

By Elaine Tan in Kuala Lumpur
Ringgit takes a dive amid multiple woes
Thousands of Malaysians call for Prime Minister Najib Razak’s resignation amid accusations of corruption in Kuala Lumpur on Aug 30. Political turmoil, coupled with falling oil and commodity prices, have sent the ringgit tumbling. (Photo / AFP)

Shringgit. That’s what the frustrated man on the street has come to label the Malaysian ringgit. The combination of a stronger US dollar and plunge in crude oil prices has not been kind to Asian currencies. But none has felt the heat as much as Malaysia, which derives almost a third of its national income from crude oil and petroleum-related revenue.

Asia’s worst-performing currency has dropped to a 17-year low against the US dollar, trading at 4.19 as of Aug 31.

The ringgit has been on an unsteady, mostly downward, path for some time. It started 2015 at 3.4965 to the dollar, the weakest it had been since 2010. By July, it broke through the psychological 3.8 level, the value of the ringgit’s peg to the dollar after the 1997 Asian financial crisis. Since then, the currency has declined quickly to reach its current low.

A perfect storm of events acting against the ringgit has led to its dismal performance.

Falling Brent crude oil prices were already testing investor tolerance for Malaysia’s inherent structural weaknesses, vulnerability to price shocks in commodities, high levels of public and household debt, declining current account surplus and large share of foreign holdings of the country’s bonds.

Then the 1Malaysia Development Berhad (1MDB) saga exploded.

“To compound the issues facing Malaysia’s real economy, recent political events have startled investors and jeopardized the country’s political status quo,” said FocusEconomics, a provider of economic analysis and forecasts, in its report FocusEconomics Consensus Forecast ASEAN.

What began as uneasiness over the financial position of the state-owned investment fund has since escalated to political and corruption scandals of epic proportions.

“Prime Minister Najib Razak was first accused in July of receiving funds for personal gain from 1MDB. Since then, Najib has responded to calls for his resignation by reshuffling his cabinet, suspending media outlets and blocking websites that have reported on the scandal,” the report added.

On Aug 29 and 30, hundreds of thousands of Malaysians took to the streets of Kuala Lumpur to protest against Najib’s leadership.

1MDB’s financial position remains a hot potato. Singapore’s Business Times recently reported that Abu Dhabi’s International Petroleum Investment Co (IPIC) may pull out of a plan to inject $1 billion into 1MDB to help restructure a portion of its $11.6 billion debt.

Spooked foreign investors have pulled out of Malaysian markets and continue to do so on the back of negative sentiments and news.

ANZ Research reported that since September 2014, foreign portfolio outflows have totaled $18 billion. Concurrently, residents have been contributing to the pressure on the ringgit by sending their money out.

“The decline in Malaysia’s foreign exchange reserves has also increased the ringgit’s vulnerability,” Khoon Goh, senior foreign exchange strategist at ANZ Bank Singapore, says.

Malaysia’s foreign exchange reserves have dipped below $100 billion as Bank Negara Malaysia attempted to shore up the currency. The Southeast Asian country’s central bank has since stepped away from supporting the ringgit to preserve its reserves for an anticipated rate hike from the US Federal Reserve.

Against this backdrop, the depreciation of the yuan was another death knell for the beleaguered ringgit, which immediately fell past 4 against the greenback.

“The yuan (depreciation) is negative for Malaysia due to increased competition for Malaysian exporters, who are enjoying the benefits of ringgit depreciation and the fear of a China slowdown further pressuring global commodity prices,” Kuala Lumpur-based Hong Leong Investment Bank explained in a report.

The general consensus, however, is that the weakening of the ringgit does not fully reflect Malaysia’s economic fundamentals. “The economic fundamentals of the country are fairly robust, but this is being overshadowed by local politics,” Goh says.

The economy exceeded market expectations to record a 4.9 percent year-on-year GDP growth in the second quarter. This, however, follows a stronger 5.6 percent performance in the previous quarter.

According to the International Monetary Fund, the ringgit is undervalued by about 15 percent. But amid a crisis of confidence, which is essentially the problem faced by the Malaysian currency at the moment, sentiments need to improve for correction to happen.

Ringgit takes a dive amid multiple woes

“Unfortunately, it is difficult to see any turnaround in sentiment in the near term,” says Goh.

Consider how the ringgit has tumbled against the Singapore dollar. Much to the chagrin of Malaysians and the delight of Singaporeans who move freely between the borders of both countries, the ringgit is currently trading at around 3 to the island state’s currency — an all-time low for the Malaysian currency, which at one time was on par with its neighbor’s dollar.

Like all Asian currencies, the Singapore dollar has lost ground against the greenback in the last year, although for reasons that are quite different from the ringgit.

At the start of the year, the Monetary Authority of Singapore eased monetary policy to push the city-state’s currency to 1.35 against the US dollar, its weakest since 2010. The depreciation of the yuan then caused it to slide further to a five-year low of 1.40 to the US dollar.

Still, the Singapore dollar remains robust against the ringgit, rising more than 20 percent in less than a year. Yet, despite reports of increased traffic from Singapore into Johor Bahru in Malaysia and of locals flocking to money changers to snap up the ringgit, official statistics seem to suggest that tourism and trade — expected big winners — are not significantly affected by the weak ringgit.

External trade data by International Enterprise Singapore showed January to June 2015 imports from Malaysia had fallen by 2.2 billion Singapore dollars compared to the same period last year. Meanwhile, Tourism Malaysia reported that January to March 2015 tourist arrivals from Singapore declined 8.6 percent compared to the same period in 2014.

“Despite our view that the ringgit is undervalued, history has shown that currencies can and do overshoot and it can take a while before it corrects back towards fair value,” Goh says. With the renewed slide in oil prices and the depreciation of the yuan, he forecasts the ringgit to fall to 4.25 by year’s end and 4.35 by the end of 2016.

FocusEconomics Consensus Forecast panelists are slightly more upbeat. They expect the ringgit to trade at 3.98 per dollar at the end of this year and for 2016.

But Malaysia still has to contend with the impending interest rate hikes by the US, falling commodity prices and the impact of further economic slowdown in China, Malaysia’s second-largest trade partner. Then, too, the country’s embarrassing domestic problems are far from resolved. Changes for the worse in any of these could send the currency tumbling further.

Central bank Governor Zeti Akhtar Aziz has said that the country’s economic fundamentals remain strong and the bank will not impose capital controls.

While the possibility of increasing interest rates to help lift the ringgit has been bandied about, it seems an unlikely policy move given the country’s high consumer debt levels and its ensuing impact on the people.

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