Ringgit falls to fresh three-year low

Ringgit falls to fresh three-year low
Business & Markets 2013
Written by Kamarul Anwar of theedgemalaysia.com
Friday, 23 August 2013 10:13

KUALA LUMPUR: The ringgit fell to a fresh three-year low against the greenback yesterday to 3.3095, on the back of concerns over the US Federal Reserve's withdrawal of its asset buying programme, a narrowing current account surplus and weakening government finances in Malaysia. Year-to-date, the ringgit has fallen 8.86% against the US dollar.

Nizam Idris, managing director and head of fixed income and currency strategy at Singapore's Macquarie Group, told The Edge Financial Daily fiscal reforms are needed to battle the weakening of the ringgit.

"This is just the beginning of the ringgit's fall. Talks of the Fed tapering its quantitative easing (QE) are still in the early stages and we still don't know when this will happen and how much it will be reduced," he said in a telephone interview.

Minutes of the Fed's policy meeting in July were released on Wednesday and spooked markets as investors worry about the timing and scope of the pullback in asset buying.

Malaysia, as with other emerging markets, has seen its currency depreciate in the past month as foreign investors make an exit out of fear the Fed will begin to reduce its asset buying programme, which has created massive liquidity globally.

Much of the liquidity found a home in emerging markets over the last few years, but with the impending tapering and nascent growth in developed economies, investors are now leaving.

According to the Royal Bank of Scotland, Malaysia has a high foreign ownership of government bonds — around 30% as at March this year. Reuters reported Malaysia's foreign holdings fell from RM144 billion in May to RM138 billion in June.

The weakening ringgit is a direct corollary of the rising capital outflow. Yesterday, the ringgit fell 0.45% from RM3.2947 per US dollar to RM3.3095 — the lowest level since June 2010.

Nizam said there could be more downside to the ringgit as the country is highly dependent on commodity exports and the government is spending more than it earns.

"The government is highly dependent on [Petroliam Nasional Bhd] for revenue. However, Malaysia is now already a net oil importer, which means the country spends more to buy oil than it makes from the export of oil.

"Malaysia is spending more on consumption — like the fuel subsidy — rather than on productive investments [that will grow the economy]," he said.

According to Nizam, Malaysia has been a net oil importer since February this year.

Bloomberg data shows the fiscal deficit at 4.78% to GDP. Its widest was 6.13% right after Tun Abdullah Ahmad Badawi stepped down as prime minister in 2009. His successor, Datuk Seri Najib Razak, has pledged to trim the fiscal deficit to 4% of GDP this year and 3% in 2014.

Macquarie's Nizam said Malaysia is facing a situation similar to Indonesia, where fuel is also subsidised. Should the Malaysian government allow its fiscal position to weaken, it could end up with a current account deficit, just like Indonesia, which also faces a fiscal deficit.

"I am not ruling out that possibility [of a current account deficit] in the future," he said.

Data released by Bank Negara Malaysia (BNM) on Wednesday show the country's current account surplus narrowing to RM2.6 billion in the second quarter (2Q) of this year from RM8.7 billion in 1Q and RM22.9 billion in 4Q 2012.

Maybank Investment Bank Research economist Suhaimi Ilias said the upcoming budget will be an important one for the country.

"Policymakers need to address fiscal reforms in this year's budget to help the macroeconomic balance. Also, the quality of investment made by the country is important," he told The Edge Financial Daily yesterday.

He noted that the ringgit could fall further if the country runs into a current account deficit, as foreign investors will be concerned over Malaysia's macroeconomic balance.

Nonetheless, he foresees that the current account will remain in surplus throughout the year, continuing the streak since 1997.

"With the global economy improving — as the imminent tapering of QE is a sign of the US recovery — this will bode well for the export sector," Suhaimi said, adding that the current level of the ringgit could provide a competitive edge to exports.

But Macquarie's Nizam said the exports may not do much better in the future given the uneven recovery in the US, the world's largest economy.

"The recovery is not in all sectors. The energy sector saw a recovery due to the discovery of shale gas. However, when talking about commodities, that will concern consumers. So far, the unemployment rate in the US is still high (at 7.4% in July)," he said.

Suhaimi said he expects the Malaysian economy to fare better in the second half. MALAYAN BANKING BHD [] has forecast GDP growth of 4.5% this year, revised downward from 5.3%. On Wednesday, BNM announced GDP growth of 4.3% for 2Q. It also revised its growth projection for 2013 to 4.5% to 5% from 5% to 6% earlier.



This article first appeared in The Edge Financial Daily, on August 23, 2013.