Malaysia Reserves Set to Drop Below $100 Billion

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Malaysia’s foreign-exchange reserves are set to drop below $100 billion just when the nation most needs a buffer against any collapse in investor confidence.

It doesn’t help that the holdings were last below that mark during the 2008 global credit crunch and the 1997-98 Asian financial crisis. The decline reflects intervention to support the ringgit, which breached its 1998 peg level of 3.8 a dollar this month and sank to a 16-year low. Default risk for Malaysia is about 40 basis points above that of Thailand and the Philippines as dollar bond prices fall for both a troubled state investment company and the country’s state oil producer.

Pressure on Asia’s worst-performing currency intensified this week after Prime Minister Najib Razak sacked his deputy as part of a Cabinet reshuffle for publicly voicing his comments about debt-ridden 1Malaysia Development Bhd. Also removed was the attorney general helping head one of four probes into a Wall Street Journal report that funds linked to 1MDB allegedly found their way into Najib’s accounts.

“A fall below the psychological $100 billion level may roil fragile sentiment further,” said Nizam Idris, Singapore-based head of currency and fixed-income strategy at Macquarie Bank Ltd., the second-most accurate forecaster for the ringgit in the four quarters ended June in Bloomberg rankings. “The question is, how fast will capital flow out should we suddenly get an intensification of the political story.”

A drop below $100 billion would raise concern about a “cash burn,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd., adding that the central bank would be hesitant to draw a line in the sand for the ringgit. “Given the domestic political risks, overlaid with what you see in the oil market and a generally strong dollar, it’s the so-called perfect storm.”

The following charts show Malaysia’s foreign-exchange reserves, default risk and rising dollar bond prices.

CHART 1: Malaysia’s reserves fell to $20 billion in 1998 after the ringgit weakened to a record 4.885 per dollar in January of that year, spurring capital controls and a fixed exchange rate.

CHART 2: Credit-default swaps on Malaysian sovereign debt are six basis points off January’s 1 1/2-year high as the 1MDB debacle exacerbated the ringgit’s losses.

CHART 3: A plunge in Brent crude is cutting revenue for Asia’s only major net oil exporter and pushing up borrowing costs for Petroliam Nasional Bhd. The 1MDB dollar bond yield, which climbed to a record 8.06 percent this month, is also being pressured ahead of a U.S. interest-rate increase.

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