Malaysia’s ringgit is sliding toward its fixed exchange rate of a decade ago and central bank assurances the weakness will prove temporary aren’t convincing everyone.
Macquarie Bank Ltd. is reviewing its year-end forecast of 3.75 per dollar after the currency sank last week to within 0.7 percent of a 3.80 peg imposed by former Prime Minister Mahathir Mohamad in 1998, during Asia’s financial crisis. Westpac Banking Corp. and Macquarie say it’s just a matter of time before that threshold is tested, given waning demand for emerging-market currencies as the U.S. moves closer to raising interest rates.
The decline prompted Bank Negara Malaysia Governor Zeti Akhtar Aziz to say last week that the exchange rate wasn’t consistent with the nation’s economic fundamentals, which are “markedly different” from those at the time of the crisis. While a weaker currency will help revive exports, it also threatens to add to inflationary pressure following the implementation of a new goods and services tax in April.
“There are still levels to look at higher than 3.8,” said Nizam Idris, head of currency and fixed-income strategy at Macquarie in Singapore, who’s been covering the foreign-exchange market for two decades including a stint at UBS AG. “How much is enough is the big question.”
The drop in the Southeast Asian nation’s foreign-exchange reserves will limit Bank Negara’s capacity to defend the ringgit, according to Macquarie and Westpac. While the holdings climbed to $106.4 billion in May from a four-year low of $105.1 billion in March, they have fallen 8 percent since December.
Malaysia imposed capital controls in 1998, when the ringgit plunged to a record 4.885 per dollar in January of that year and reserves stood at about $20 billion. The currency tumbled 35 percent in 1997 in the wake of the Thai baht’s collapse, prompting Mahathir to ban offshore trading in the currency, blaming U.S. billionaire George Soros and other “rogue speculators” for the ringgit’s weakness.
Repegging the ringgit is one way to stabilize the exchange rate, Mahathir was reported as saying in a Star newspaper report on Thursday, even going so far as to say the central bank should consider going back to the gold standard, a system prevalent until the early 1970s under which a unit of currency was convertible into a fixed amount of the commodity.
The currency’s losses have been compounded by a 45 percent drop in Brent crude prices from a 2014 peak, worsening public finances in Malaysia, the only net oil exporter among Asia’s major economies. Overseas shipments fell in April, this year’s third monthly decline, and inflation quickened to a four-month high of 1.8 percent as the 6 percent GST was introduced.
“Fundamentals will prevail once the uncertainty affecting market sentiment subsides,” Zeti, who helped harness the currency during the crisis when she was assistant governor, said in an e-mailed response to Bloomberg questions on June 8. Bank Negara “stands ready to maintain orderly conditions in the foreign-exchange market,” she said.
The ringgit fell 5.3 percent to 3.7635 per dollar in the past month, Asia’s worst performance, and analysts are once again lowering end-2015 projections. The median estimate in a Bloomberg survey was 3.72 at the end of last week, having been cut in all bar one of the last eight months.
While the ringgit is within striking distance of the peg, the likelihood of the currency breaching 3.8 is “not a matter of if, but a question of when,” said Jonathan Cavenagh, a currency strategist at Westpac in Singapore. “Bank Negara’s ability to fight the stronger dollar trend is being diminished somewhat compared to the past few years.”
The ringgit is vulnerable to capital outflows from higher U.S. interest rates as central bank data show global investors hold 32 percent of the nation’s sovereign bonds, compared with 18 percent for Thailand. The slump in Brent crude prompted the government to lower 2015’s growth target to a range of 4.5 percent to 5.5 percent in January, from as much as 6 percent.
A protracted drop in exports may shrink the current-account surplus, which was 10 billion ringgit ($2.7 billion) in the first quarter, the biggest since June 2014. It dwindled to 5.7 billion ringgit in the previous three months, the least since June 2013, as Brent slumped 39 percent in its worst quarterly performance since 2008.
Fitch Ratings said in March that there’s more than a 50 percent chance it will downgrade Malaysia’s A- credit rating at a review due before the end of June. The company cited falling energy prices, pressure on the current account and state investment company 1Malaysia Development Bhd.’s debt as factors.
“As with other currencies, the ringgit will face a number of pressures including a strong dollar and higher U.S. rates,” said Mitul Kotecha, head of Asia Pacific foreign-exchange strategy at Barclays Plc in Singapore, who predicts the ringgit will end the year at 3.95. “Given that Malaysia is still the only net oil exporter, any rally in oil prices may alleviate some of the pressure on the currency.”