The ringgit has weakened too much for an economy that’s set to perform better in the coming months, Malaysia’s planning minister said as a regional markets rout pushed the currency to a three-year low this week.
“Fundamentally, the ringgit shouldn’t be at this level,” Abdul Wahid Omar, minister in the Prime Minister’s Department in charge of economic planning, said in an interview in Kuala Lumpur yesterday. Southeast Asia’s No. 3 economy experienced a “slightly better” environment last quarter than the previous period and should do better in the second half, he said.
Malaysia cut its full-year growth forecast today to between 4.5 percent and 5 percent after second-quarter expansion missed economists’ estimates, adding pressure on policy makers to bolster confidence as the ringgit continued to weaken. Gross domestic product grew 4.3 percent in the three months through June from a year earlier, the central bank said in a statement.
The country was swept along in the regional turmoil this week, as the prospect of reduced U.S. monetary stimulus and Asia’s faltering growth outlook fueled a selloff of emerging-market stocks and currencies. Malaysia and Thailand may be the most vulnerable after India and Indonesia, with the former facing a deteriorating current-account balance and elevated foreign ownership of its debt, Credit Suisse Group AG said.
“While their fundamental situation is not as soft as Indonesia, Malaysia and Thailand have enough similarities in terms of high foreign-bond ownership, either softening or slowing current-account surplus or in Thailand’s case a deficit,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp. “Those are the types of things that the market is really not looking on very favorably.”
The ringgit fell 0.2 percent to a new three-year low of 3.2947 a dollar today. The benchmark FTSE Bursa Malaysia KLCI Index was little changed after sliding 1.9 percent yesterday, the biggest drop since January. Markets have plunged across the region this week, with the Indian rupee dropping to a record low and Indonesia’s rupiah touching the lowest level since 2009.
“It wasn’t expected to come down to this level,” Abdul Wahid, 49, said. “We need to make sure that we address the concerns that the market will have.”
Analysts at Barclays Plc are recommending bond investors hold underweight positions in Malaysia, Thailand and Indonesia, citing slowing growth and policy uncertainty in Thailand, and weak public finances in Malaysia. Thailand’s economy entered a recession in the three months through June.
Malaysia’s current-account surplus probably shrank to 900 million ringgit ($274 million) in the second quarter, according to the median estimate of five economists surveyed by Bloomberg News. That would be the smallest since at least 1999, according to data compiled by Bloomberg.
There is a real risk that the current account could slip into a deficit for the first time since the fourth quarter of 1997, Macquarie Group Ltd. analysts said in a report this month.
“We are aware of this situation and we are aware of some of the measures to be undertaken to make sure that Malaysia remains in a surplus position,” Abdul Wahid said, without elaborating on the steps. “It is still a surplus and we are managing it.”
The surplus is narrowing on increased overseas investment and property buying, higher imports for infrastructure projects, lower palm oil and rubber export prices and the acquisition of new aircraft by Malaysian Airline System Bhd., the minister said.
Malaysia will need to address concerns raised by Fitch Ratings and Moody’s Investors Service over the budget deficit and “rationalize” state subsidies while broadening the nation’s tax base, Abdul Wahid said. Prime Minister Najib Razak, who is also finance minister, will unveil initiatives to ensure the government meets its target of cutting the shortfall to 3 percent of GDP in 2015, the minister said. The prime minister will give his 2014 budget address on Oct. 25
The implementation of a goods and services tax “will have to come on the agenda,” said Abdul Wahid, who also sits on an Economic Council chaired by Najib, along with central bank Governor Zeti Akhtar Aziz.
Fitch cut Malaysia’s rating outlook to negative from stable last month, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform. Moody’s said this month the country has a “narrow” revenue base and “relatively high” government deficits, state subsidy bills and debt.
The subsidy bill “is not sustainable,” Abdul Wahid said. The government spent 24 billion ringgit last year on fuel subsidies for consumers and industries, he said. It also ensured some food items were available below market price.
“The issue is how to address the subsidies in a manner that is acceptable to the people so that it doesn’t present a shock to the economy,” the minister said. Assistance will be made more targeted toward the poor, he said, without providing details.
Private-sector spending has picked up since Najib was returned to power in the May general election, Abdul Wahid said.
“People were a bit more cautious in the first half leading up to the election and it takes time to actually ramp up,” he said. “Now that the elections are over, people have started to invest. In the second half, we should see things improving.”
Malaysia’s government will review its official 2013 growth forecast of 5 percent to 6 percent after today’s GDP report, said the former Malayan Banking Bhd. chief executive officer who was recruited into Najib’s cabinet after the election.
“If you look at the second quarter versus the first quarter, you can feel that the environment was slightly better,” he said. “The second half should be better than the first half.”
People shouldn’t worry too much about short-term market swings, the minister said. “If you fix the fundamentals, the short-term fluctuations will take care of themselves.”