Malaysia’s Oil Shields Ringgit as Rupiah Exposed: Asean Credit

Higher Crude Prices Inflate Cost Of Fuel Subsidies
Vehicles move past a Petronas gas station in Kuala Lumpur. While higher oil prices inflate the cost of fuel subsidies and hamper government efforts to rein in Malaysia’s budget deficit, the nation has a current-account surplus that provides support for the ringgit. Photographer: Goh Seng Chong/Bloomberg

June 24 (Bloomberg) -- The ringgit will weather a surge in oil prices better than other Southeast Asian currencies as Malaysia is the region’s sole net exporter of crude, providing support for bonds, BNP Paribas Investment Partners says.

Options traders are the least pessimistic on the ringgit’s outlook, while the currencies of net oil importers such as Indonesia and Thailand are viewed as the most vulnerable, data compiled by Bloomberg show. Crude climbed last week to the highest level since September, driven by concern escalating violence in Iraq will disrupt world supply, and Malaysian bonds outperformed the rest of the region over the past month.

While higher oil prices inflate the cost of fuel subsidies and hamper government efforts to rein in Malaysia’s budget deficit, the nation has a current-account surplus that provides support for the ringgit. Indonesia and Thailand also subsidize fuel costs and face worsening budget shortfalls at the same time as their current-account gaps swell.

“We are a little more positive on the ringgit,” Mark Capstick, a London-based portfolio manager at BNP Paribas Investment Partners overseeing 488 billion euros ($663 billion) globally, said in a June 20 interview. “Malaysia stands to benefit from oil-price rises. The total return that comes from bonds with the currency has made it more attractive.”

One-week options contracts giving the right to sell the ringgit over those to buy are at a 0.1 percentage-point premium, compared with 0.7 point for Indonesia’s rupiah, 0.5 for the Thai baht and 0.3 for the Philippine peso, according to data compiled by Bloomberg.

The rupiah is one of the “fragile five” currencies vulnerable to higher fuel prices because most of the nation’s trade shortfall is made up of oil imports. The term was first used by Morgan Stanley to describe currencies at risk due to dependence on foreign investment to fund current-account deficits. The other four are India’s rupee, South Africa’s rand, Turkey’s lira and the Brazilian real.

Bond Returns

While Capstick purchased forwards in Malaysia’s currency to benefit from potential gains, he said bond yields could still rise on prospects the central bank will boost borrowing costs for the first time since 2011. One-year interest-rate swaps climbed three basis points, or 0.03 percentage point, to 3.67 percent in June, above Bank Negara Malaysia’s 3 percent rate.

The nation’s local-currency sovereign notes returned 0.5 percent over the past month, compared with a gain of 0.4 percent in Indonesia, according to indexes compiled by HSBC Holdings Plc. Philippine notes fell 0.6 percent and Thai securities dropped 0.3 percent.

The ringgit gained the most among Southeast Asian currencies today, climbing as much as 0.3 percent to 3.2112 per dollar in Kuala Lumpur. It has advanced 2.6 percent in the past three months, the best performance in the region after the peso’s 2.8 percent advance, data compiled by Bloomberg show.

GDP Impact

“Since Malaysia is a net oil exporter, the ringgit should be more resilient to rising oil prices compared to import-intensive countries in the region such as Indonesia,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said in a June 18 telephone interview. The oil price increase will be positive for Malaysia’s gross domestic product and current account, which will support the ringgit, he said.

While a 10 percent sustained rise in the cost of crude will add 20 basis points to Malaysia’s GDP growth, it will shave 45 basis points off Thailand’s pace and 30 basis points from that of the Philippines, Chua said.

Malaysia’s economy will expand 4.5 percent to 5.5 percent this year, while Thailand will grow 1.5 percent, according to official forecasts. In Indonesia, the GDP increase is predicted at 5.5 percent and the Philippines is seeking expansion of as much as 7.5 percent.

More Attractive

The rupiah is offering more attractive returns to investors willing to take more risk than the ringgit, according to LGT Group. The Federal Reserve’s pledge this month to keep borrowing costs low will also encourage more carry trades, said Simon Grose-Hodge, head of investment strategy for South Asia.

Indonesia’s benchmark interest rate is 7.5 percent, while the nation’s 10-year government bonds yield 8.17 percent. Similar-maturity notes in Malaysia pay 4.07 percent. In a carry trade, investors borrow money in a country with low rates and park the money elsewhere seeking higher returns.

“For the more conservative investors, the Malaysian ringgit and the Philippine peso are nice, middle of the road currencies,” Grose-Hodge said in a June 19 telephone interview in Singapore. “Those that are more aggressive tend to look at the more exotic currencies.”

Rising oil prices may force Malaysia’s government to raise fuel prices in the third quarter to reduce its subsidy bill, a measure that may be needed if it wants to achieve the target of cutting the fiscal deficit to 3.5 percent of GDP in 2014 from 3.9 percent last year, said Bank of America’s Chua.

Fuel Subsidies

Indonesia is more susceptible because its fuel-subsidy bill amounted to about 3.4 percent of GDP in 2013, compared with 2.9 percent in Malaysia and 1.4 percent in Thailand, Chua wrote in a June 17 research report. Oil prices climbed to a nine-month high of $107.73 a barrel in New York on June 20 and are up 3 percent this month.

Malaysia had a current-account surplus of 19.8 billion ringgit ($6.2 billion) in the first quarter, rising from 14.8 billion ringgit in the previous three months, official data show. In the Philippines, the broadest measure of trade was a $2 billion excess, or about 3.1 percent of GDP, the central bank reported June 20.

The first-quarter shortfall in Indonesia narrowed to $4.2 billion from $4.3 billion, while Thailand’s turned to a $643 million deficit in April from March’s $2.9 billion surplus.

The rupiah, rupee, rand, and lira are the worst performers among 31 major currencies tracked by Bloomberg over the past month.

“People are less pessimistic about the ringgit because Malaysia is a net exporter of oil, and that means its currency will benefit most in the region,” Wong Chee Seng, a foreign-exchange strategist at AmBank Group in Kuala Lumpur, said in a telephone interview yesterday. “Indonesia will be most affected as higher crude oil prices will worsen the nation’s fiscal and current-account deficits and this will weigh on the rupiah’s outlook.”

To contact the reporters on this story: Elffie Chew in Kuala Lumpur at; Lilian Karunungan in Singapore at

To contact the editors responsible for this story: Sandy Hendry at Simon Harvey, Anil Varma