Highlight Rabobank: Ringgit recovery not anytime soon

by **Cals** Wed 14 Oct 2015, 01:57

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[size=28]Rabobank: Ringgit recovery not anytime soon

By Azril Annuar / theedgemarkets.com | October 13, 2015 : 4:36 PM MYT

KUALA LUMPUR (Oct 13): The ringgit is unlikely to improve anytime soon due to external economic forces such as China's Aug 11 currency devaluation and the risk of a US Federal Reserve (Fed) interest rate hike this year, which will put further downward pressure on the ringgit, said Rabobank head of financial markets research for Asia-Pacific Michael Every.

He said there is nothing much Malaysia can do on its own amid a global economic slowdown.

"Higher US interest rates will be negative for the ringgit and will see outflow of capital that we are seeing from emerging markets and I don't see that as positive for Malaysia unfortunately. But I also said if the US don't raise interest rates because the US economy is weak, that is also not positive for Malaysia," he told a press conference after Rabobank's exclusive business forum here today.

"So it's very difficult to see where the positive is for Malaysia under these two scenarios. That's the problem," he added.

As Malaysia is a commodity-exporting country, Every said China's devaluation of its currency coupled with an US interest rate hike will serve as a double whammy to the ringgit.

As such, he sees last week's ringgit rebound against the US dollar as temporary.

"I cannot see this rebound being sustained given the backdrop we have in the US and China. Maybe it's (ringgit) being sold too aggressively before, but it has been bought far too aggressively over the past week. In the near term, we'll see it giving back," said Every.

He estimates the ringgit hovering at about 4.25 to 4.30 against the greenback in the near term.

"Where the ringgit trends from there will depend on global factors.

"But it doesn't look great. If the Fed raises interest rates, we will see China devaluing its currency again (and this) will be a double whammy to Malaysia," said Every.

Every said the best Malaysia can do at the moment is to accept the fact that market volatility will be the new norm.

"I don't really think you can do much. If the country wants to artificially support the ringgit, they could raise interest rates but that will be a disaster for the country. You could introduce capital controls (and) that (too) would be a disaster for the country.

"You could try to encourage 'Buy only Malaysian products and don't buy imports', but that's protectionism and everyone else will say the same about Malaysian products. That's a disaster for the country," he said.

"What I think one has to do is understand the backdrop today that volatility is the new normal. Regrettably, Malaysia is not alone in this problem. Many other countries are suffering too, but this is something we all have to face for the next few years," he added.

According to Every, previous market volatility normally lasts for up to 12 months.

"Previously, you see volatility lasting for six, nine or maybe 12 months at the worst and then another country would emerge to be the consumer of last resort. Usually it was America.

"Now America, Europe and Japan are not in that position. And the reason why the Chinese devaluation worry the market is because the market thinks if it happens in China, China is also not in that position (to be the consumer of last resort).

"At which point we all would be looking around desperately for some new 'superman' to come and save us and there isn't anybody … unless we can export to Mars," he said.

Compounding the problem is the fact that Malaysia has one of the highest household debts in the world.

"The best ways to actually reduce household debt are firstly, pay everybody more and everyone's salary goes up and they spend commensurately less than they did before on that new money. Your debt-to-GDP ratio will gradually be reduced in the household sector.

"Unfortunately that is hard to do, particularly in the current global economic scenario," said Every.

"Another way is to export your way out, so that the economy grows and money comes in from overseas. Unfortunately that's very hard to do at the moment for every country and not just Malaysia.

"So, this really underlines why the ringgit has been weakening because these two problems are extremely difficult and they are interlinked," added Every.

As at 4.14pm today, the ringgit was traded down 0.82% at 4.1815 against the US dollar.
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