Ringgit Forwards Rise a Second Week, Bonds Gain on Budget Steps

Forward contracts in Malaysia’s ringgit climbed for a second week after Prime Minister Najib Razak announced the implementation of a goods and services tax to help rein in the fiscal deficit.

The government plans to introduce a 6 percent GST rate in April 2015 and in so doing eliminate the existing sales and services tax, Najib said in his 2014 budget speech in parliament today. He’s seeking to cut the fiscal shortfall to 3.5 percent next year from the targeted 4 percent in 2013, according to the finance ministry’s 2013/2014 economic report issued today. The 10-year sovereign bond yield fell to a three-month low, while the ringgit was little changed.

One-month non-deliverable forwards rose 0.5 percent to 3.1357 per dollar as of 5:39 p.m. in Kuala Lumpur, the highest level since June 17, according to data compiled by Bloomberg. The contracts gained 0.7 percent for the week. The yield on the bonds due March 2023 fell 15 basis points in the five days, the biggest drop since the period ended Sept. 13, to 3.58 percent and the lowest level since July 8.

“You can say they over-delivered in terms of meeting the market expectations, from the forecast on the fiscal deficit to GST percentage,” said Irene Cheung, a currency strategist in Singapore at Australia & New Zealand Banking Group Ltd. “The ringgit has responded well in the NDF market.”

Corporate Tax

Malaysia will lower the corporate tax rate to 24 percent from 25 percent when the GST starts, Najib said today. Cheung said the development was a positive for the stock market.

The FTSE Bursa Malaysia KLCI Index climbed 1 percent this week to 1,817.57 for a fourth straight five-day gain, the longest winning streak since April. It closed at a record high of 1,818.93 yesterday.

Moody’s Investors Service said last month the budget deficit may exceed 4 percent of gross domestic product this year and warned the government’s fiscal targets will become “increasingly out of reach” without additional measures to contain it. The shortfall was 4.5 percent in 2012.

Southeast Asia’s third-largest economy has posted fiscal shortfalls since 1998. Fitch Ratings lowered the outlook on Malaysia’s A- ranking, the fourth-lowest investment grade, to negative from stable in July, citing rising debt levels and a lack of budgetary reform.

Malaysia’s debt as a proportion of gross domestic product may rise to 54.8 percent this year from 53.3 percent in 2012, according to the finance ministry’s report. Foreign holdings of the nation’s government bonds climbed to 31 percent as of June from 11.4 percent at the end of 2008, the report said.

The cost to insure Malaysian government debt using credit default swaps fell to 110.4, compared with 131.5 on Sept. 30 and the year’s high of 157 reached in August, CMA prices show.

‘Positive Moves’

The budget will lay the foundations for the nation’s future expansion and prosperity, Najib, who is also finance minister, said in an e-mailed statement yesterday. Policy makers have kept borrowing costs at 3 percent since May 2011 to spur growth.

The economy will expand 5 percent to 5.5 percent next year, from an estimated 4.5 percent to 5 percent in 2013, according to the finance ministry’s economic report. The current-account surplus may narrow to 26.6 billion ringgit ($8.4 billion) this year from 57.3 billion ringgit in 2012, the report showed.

The ringgit climbed 0.1 percent today to 3.1566 per dollar and was steady from a week ago. It touched a four-month high of 3.1413 on Oct. 18 and has appreciated 3.5 percent in October, the second-best performance among Asia’s 11-most traded currencies after Indonesia’s rupiah.

“The ringgit’s move is probably a reflection of some people seeing positive moves on the fiscal front,” Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore said today before the budget announcement. “The concerns are still there, so I don’t think it’s an overwhelmingly bullish or positive story on the ringgit front.”

Ringgit Outlook

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, climbed five basis points, or 0.05 percentage point, to 8.30 percent today, trimming the week’s decline to 25 basis points, data compiled by Bloomberg show.

Maybank raised its year-end forecast for the currency to 3.10 per dollar from 3.20 due to the “soft” dollar environment and expectations of budget measures to contain the deficit, the lender’s analysts including Leslie Tang wrote in a report yesterday. That contrast with the median estimate of 36 analysts in a Bloomberg survey for a year-end rate of 3.24.

A government report today showed consumer prices rose 2.6 percent in September from a year earlier, compared with 1.9 percent in August. That was the fastest pace since January 2012 and compared with the median forecast of 17 economists for a 2.5 percent increase.

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