No Break for Worst Asian Currency as Clouds Gather Over Malaysia

Y-Sing Liau
Bloomberg
August 4, 2016

The bad news just doesn’t stop for Asia’s worst-performing currency.

Already reeling from a renewed slump in oil prices and a political scandal that just won’t go away, the Malaysian ringgit is now facing the prospect of another cut in interest rates. It’s the region’s biggest loser in the past month and analysts still see scope for it to drop more than 2 percent by year-end.

The currency’s slide highlights all is not well as the nation’s economy heads for its worst performance this decade. Crude oil’s plunge to a four-month low this week undermines the finances of net oil exporter Malaysia, while the appeal of its relatively high bond yields is being tempered by the scandals surrounding a troubled state investment fund. Rabobank Group and UBS Group AG both predict Bank Negara Malaysia will add to its first rate cut in seven years in coming months.

Another rate reduction “will be a further negative for the currency because one of the things that’s attractive about it is it’s got a relatively high yield,” said Michael Every, head of financial markets research at Rabobank in Hong Kong. “They’ve been extremely stable on the interest-rate front up until the last cut. If we get another one, it will get the market thinking: ‘What do they know that we don’t?’”

July’s easing was a “pre-emptive move” and there are no current plans to adjust rates again over the next few meetings, although policy makers will look at data to see what is needed, central bank Governor Muhammad Ibrahim told the official Bernama news agency in an interview published July 14. Malaysia is able to absorb external shocks should the global economy deteriorate, Muhammad told Bernama.

Brent crude’s 13 percent slump this quarter is exacerbating Malaysia’s woes. Sliding energy prices have eroded export earnings and rising costs are curbing business investment. Economic growth slowed to the least in more than six years in the first quarter, and analysts project it will ease to 4.2 percent for the year as a whole, the least since 2009.

The outlook for the currency is linked to oil prices as Malaysia derives 20 percent of its revenue from energy-related sources. The nation loses 450 million ringgit in annual income for every $1 decline in oil, the prime minister said in April.

Lagging Behind

The ringgit has dropped 1.3 percent in the past month, underperforming its regional peers which all recorded gains except for the Philippine peso and Indonesia’s rupiah. The currency traded at 4.051 per dollar as of 7:56 a.m. in London on Thursday. It was as strong as 3.142 in August 2014, when oil was still above $100 a barrel.

The ringgit will weaken to 4.10 per dollar by the end of September and 4.15 by year-end, according to the median estimates of analysts surveyed by Bloomberg. Rabobank is more bearish, predicting 4.15 by Sept. 30 and 4.30 by the end of December, Every said.

Bank Negara unexpectedly cut its benchmark interest rate by a quarter point to 3 percent on July 13 to bolster growth, and analysts say pressure is building for another move.

UBS projects the central bank will make another quarter-point rate cut by early next year and the ringgit will weaken to 4.40 per dollar by the end of December in anticipation. Three-year bonds yield five basis points less than the central bank rate, signaling investors see a chance for further easing.

‘Common Problem’

“Malaysian export growth continues to be weak, a common problem among emerging-market economies, and the current-account surplus is expected to narrow further, which could put pressure on the currency when portfolio inflows slow,” said Maximillian Lin, a currency strategist at UBS in Singapore.
Sentiment toward the economy has soured as global probes into 1Malaysia Development Bhd. gathered pace, raising the stakes in a scandal which has dogged Prime Minister Najib Razak for more than a year.

1MDB is at the center of a controversy involving accusations of embezzlement and money laundering. It defaulted on a $1.75 billion bond in April amid a dispute with the co-guarantor as to who was liable for the payment.

U.S. prosecutors said on July 20 they’re looking to recover more than $1 billion in assets they contend were siphoned from 1MDB, whose advisory board Najib chaired until recently. The Monetary Authority of Singapore announced a day later it had seized S$240 million ($179 million) in assets from individuals linked to alleged fraud at the fund. Najib and 1MDB have both denied wrongdoing.

‘Fairly Benign’

Not everyone is bearish.

JPMorgan Chase & Co. predicts the ringgit will stay between 3.90 and 4.10 per dollar in the second half as Malaysia’s relatively high bond yields attract investors. That scenario would only be threatened if the Federal Reserve were to raise interest rates at the same time as Bank Negara cuts them, its foreign-exchange analysts say.

“If the Fed outlook was fairly benign it’s not likely that another rate cut would hurt ringgit sentiment all that much,” said Jonathan Cavenagh, head of Asia emerging-market currency strategy at JPMorgan Chase in Singapore. “Outright yields are still quite high, particularly compared to the major developed markets. Hence we would expect limited downside in the ringgit.”

While Malaysian bonds offer the second-highest interest payments in Southeast Asia after Indonesia’s, they are losing their allure. The yield on the benchmark 10-year security dropped to 3.62 percent on Thursday, from as high as 4.45 percent in August 2015.

“High foreign participation in the local currency bond market — we estimate 34 percent of outstanding Malaysian government securities are owned by foreigners — makes the ringgit very sensitive to the Fed outlook and to domestic political developments,” UBS’s Lin said.