Volatility Rises Most in Malaysia as Flows Imperiled
Currency swings are rising in Malaysia at the world’s fastest pace as concern mounts that the ruling coalition will lose its 55-year grip on power after attracting more foreign capital than any other emerging market except Mexico.
Three-month implied volatility for the ringgit, a measure of expected exchange-rate moves used to price options, jumped 2.2 percentage points to 7.4 percent in 2013, more than any of the 47 currencies tracked by Bloomberg. The ringgit has lost 1.6 percent this year and reached a five-month low in February as Credit Suisse Group AG and ING Groep NV cut their forecasts.
Polls show support for Prime Minister Najib Razak, who embarked on a $444 billion development plan to build railways and power plants, is the lowest since 2011 ahead of elections due before the end of June. Investors may pull from the local bond market as much as $10 billion, or 24 percent of their total holdings, as opposition leader Anwar Ibrahim pledged to review highway-toll contracts and the granting of tax permits to large companies, according to Credit Suisse.
“The volatility rate reflects worries of capital outflows in the lead up to the election, which looks uncertain at this time,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore, said in a March 6 interview. “In the long term, I am still positive on the fundamentals of the ringgit and the bond market in Malaysia.”
Malaysia, Southeast Asia’s third-largest economy after Indonesia and Thailand, attracted investment, including bonds and stocks, equivalent to 4.5 percent of gross domestic product in the year through September, the second-highest percentage among 21 developing nations after Mexico, strategists at Goldman Sachs Group Inc. wrote in a Feb. 25 report.
Overseas funds boosted ownership of government debt to a record 132 billion ringgit ($42.5 billion) as of January, or 30 percent of the securities outstanding, Bank Negara Malaysia data show. That compares with foreign holdings of $28.9 billion in Indonesia local-currency notes and $16.9 billion of Thai baht debt, based on central bank and finance ministry figures.
“For any government, whether the new or existing one, they want to maintain stability,” Sean Chang, the Hong Kong-based head of Asian debt at Barings Asset Management, which oversees $52 billion globally, said in a Feb. 25 interview.
Credit Suisse said in a Feb. 21 report that foreign purchases of Malaysian bonds rose 27 percent last year and those of Treasury bills increased 73 percent, “much larger” than any other Asian markets.
“The anxiety experienced by investors may only be short term,” Chang said. “But over the medium to long run, the government has proven they are effective in implementing their policies.”
Najib, 59, must dissolve Parliament by the April 28 deadline and hold the poll within 60 days. His Barisan Nasional coalition lost a two-thirds majority in Parliament after winning the 2008 election by the smallest ever margin.
His approval rating fell to 61 percent in February, the lowest since August 2011, from 63 percent at the end of December, according to a survey from the Merdeka Center for Opinion Research issued Feb. 26.
The ringgit dropped to 3.1265 per dollar on Feb. 1, the weakest level since Sept. 3. It gained 0.1 percent to 3.1065 in Kuala Lumpur today. The FTSE Bursa Malaysia KLCI Index (FBMKLCI) of stocks has fallen 2.2 percent this year, the worst performance in Asia.
The ringgit’s three-month implied volatility has climbed from a five-year low of 4.55 percent on Dec. 12, according to data compiled by Bloomberg.
Since coming to office, Najib has liberalized the services sector, including allowing overseas investors to own private schools and universities. He also raised foreign-ownership limits in local banks and insurers to 70 percent from 49 percent.
The opposition People’s Front coalition will review the current administration’s business policies if it comes to power and is debating whether to continue with the government’s plans to develop a $20 billion energy hub in the southern state of Johor, Rafizi Ramli, strategic director of the People’s Justice Party, which is part of that coalition, said Dec. 18.
Strategists at ING predicted the ringgit will weaken 0.7 percent to 3.128 per dollar in six months, cutting their forecast from 3.046. Politics could add “depreciation pressure” on the currency, Tim Condon, the chief Asian economist at ING in Singapore, wrote in a Feb. 4 report.
Credit Suisse’s analysts expected a 0.8 percent drop to 3.13 per dollar in three months, compared with a prior estimate of 3.0, according to its Feb. 21 report. Citigroup Inc. took an “underweight” position in the ringgit in its model for emerging-market bonds on Feb. 10, expecting a decline in the run-up to the elections.
“The reform agenda may be somewhat deflected in the near term but we think there’s enough momentum behind that process that it’s not going to come to a complete standstill,” Kenneth Akintewe, a Singapore-based fund manager at Aberdeen Asset Management Plc, which manages $314 billion globally, said in a March 4 interview. “We would look for opportunities if the market overreacts to the election risk to actually reposition in the currency market.”
Malaysia’s $288 billion economy expanded 5.6 percent last year, the fastest pace since 2010. While growth will slow to 5 percent in 2013, it is still above its five-year average, according to the median estimate of economists in a Bloomberg survey published Feb. 27.
The surplus in the country’s current account, the broadest measure of trade, amounted to about 11 percent of GDP in 2011, more than any other Asian country except Singapore, data compiled by Bloomberg show. It is easier to do business in Malaysia than in Sweden, Canada and Germany, according to the World Bank’s Doing Business 2013 report, which ranks the Asian nation 12th among 185.
As part of Najib’s development plan started in 2010, the ruling parties set out to reduce the country’s reliance on exports by luring foreign companies such as Dutch oil storage firm Royal Vopak NV, German chipmaker Infineon Technologies AG and U.S. computer-solutions provider International Business Machines Corp.
Companies in the Southeast Asian nation raised 21.2 billion ringgit in initial public offerings in 2012, the fifth highest in the world, according to data compiled by Bloomberg.
While “panic unwinding” is less likely, investors may pare their holdings of Malaysian fixed-income securities ahead of the polls, causing capital outflows of as much as $10 billion in the first half, Credit Suisse analysts led by Singapore-based Ray Farris wrote in the report.
In the event of a win by the opposition coalition, which the bank puts at 10 percent, the currency may weaken toward 3.25 per dollar, a level last seen in 2010, according to the report.
“An opposition victory would likely be disruptive to capital flows and the ringgit, not because it would necessarily be a ‘bad’ outcome, but because after decades of Barisan Nasional rule, it would create significant uncertainty for investors about the direction of policy and the structure of business in Malaysia,” according to Credit Suisse.