Ringgit Falls Most in 3 Weeks, Bonds Drop on Fitch Outlook Cut

Malaysia’s ringgit declined the most in three weeks and bonds extended losses after Fitch Ratings cut the nation’s credit outlook to negative from stable, citing rising debt levels and a lack of budgetary reform.

The currency dropped to a three-year low and 10-year bond yields climbed to the highest since April 2011 after Fitch said in a statement yesterday that Malaysia’s public finances are its “key rating weakness.” The shrinking current-account surplus and $2.9 billion of sovereign debt maturing today raises the risk of capital outflows, putting the ringgit on course for its worst month in more than a year.

“The dynamics of Malaysia’s current-account surplus getting narrower and the fiscal deficit getting wider are negative for the ringgit,” said Nizam Idris, head of fixed income and currency strategy at Macquarie Bank Ltd. in Singapore. “The shorter-term issue is the bond repayment, which the market has been worried about.”

The ringgit depreciated 0.6 percent, the biggest decline since July 8, to 3.2462 per dollar as of 10:33 a.m. in Kuala Lumpur, according to data compiled to Bloomberg. The currency touched 3.2475, the weakest level since July 2010, and lost 2.7 percent this month.

The yield on 3.48 percent government notes due March 2023 rose one basis point to 4.11 percent, the highest for a benchmark 10-year note since April 2011 and adding to an 18 basis-point increase yesterday. The two-year onshore interest-rate swap climbed two basis points to 3.36 percent, matching the highest level since August 2011, based on closing prices compiled by Bloomberg.

Deficit Target

Fitch affirmed Malaysia’s long-term foreign currency-denominated rating at A-, the fourth-lowest investment grade. It will be difficult for the government to meet a 3 percent deficit target in 2015 without more consolidation, the company said in the statement.

Malaysia’s debt to gross domestic product ratio of 53.5 percent is higher than 25 percent in Indonesia, 51 percent in the Philippines and 43 percent in Thailand, data compiled by Bloomberg show. It’s also approaching the government’s 55 percent limit. The budget deficit widened to 4.7 percent of GDP in 2012 from 3.8 percent in 2011, led by a 19 percent rise in spending on public wages ahead of the May election, Fitch said.

Pressure on the ringgit will remain until the external outlook improves and Bank Negara Malaysia will probably defend the ringgit’s 3.25 per dollar level, according to a DBS Group Holdings Ltd. research note today. The current-account surplus will narrow to 6 percent in 2013 from 6.1 percent last year and 12 percent in 2011, a Bloomberg survey of economists shows.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 20 basis points, or 0.20 percentage point to a three-week high of 8.74 percent.

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