Ringgit Posts Worst Annual Drop Since 1997 Crisis as Fed Tapers

Malaysia’s ringgit completed its worst annual loss since the 1997 Asian financial crisis on concern capital inflows will slow as the Federal Reserve trims its record monetary stimulus.

The Fed announced on Dec. 18 that it will start cutting monthly bond purchases by $10 billion to $75 billion in January and pledged to keep interest rates near zero until inflation and unemployment improve. Malaysia’s government bonds returned 0.9 percent in 2013, the smallest increase in four years, according to an index compiled by HSBC Holdings Plc.

“The trigger for the ringgit was the Fed tapering,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “The Fed’s policy shift had a large impact.”

The ringgit slumped 6.7 percent in 2013 to 3.2757 per dollar in Kuala Lumpur, the biggest annual drop since a 35 percent decline in 1997, according to data compiled by Bloomberg. The currency touched 3.3377 on Aug. 28, the weakest level since June 2010 and gained 0.6 percent today.

One-month non-deliverable forwards retreated 6.7 percent in 2013 and climbed 0.6 percent today to 3.2809 per dollar, 0.2 percent weaker than the spot rate. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 285 basis points, or 2.85 percentage points, this year to 7.59 percent.

Fiscal Consolidation

Three-year government bonds outperformed 10-year notes in 2013 on concern inflation will accelerate as the government plans to add to cuts in fuel and sugar subsidies by raising electricity tariffs next month.

Consumer prices climbed 2.9 percent in November from a year earlier, the biggest increase since December 2011, official data show. December figures are due on Jan. 22.

The yield on 10-year government bonds advanced 64 basis points in 2013 to 4.12 percent, while rates on three-year debt climbed 34 basis points to 3.33 percent, data compiled by Bloomberg.

Overseas investors held 30 percent of Malaysian government bonds as of October, compared with 18 percent in Thailand, official data show. Global funds increased their holdings of Malaysian sovereign debt by 7.9 percent to 141 billion ringgit ($43 billion) in October from the previous month, according to the latest central bank figures.

Prime Minister Najib Razak announced 11 measures yesterday to cut public expenditure as the government steps up efforts to reduce its fiscal deficit, according to a Dec. 30 report from the local Bernama news service. The nation aims to shrink its shortfall to 3.5 percent of gross domestic product in 2014 from an estimated 4 percent for 2013, the finance ministry said in an October report.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE