Ringgit Climbs to Four-Month High on Deficit Reduction Measures

Malaysia’s ringgit rose to the highest level since June and 10-year bond yields held at a three-month low after Prime Minister Najib Razak announced a goods and services tax to help cut the fiscal deficit.

The government plans to introduce a 6 percent GST rate in April 2015 and is seeking to shrink the shortfall between revenue and spending to 3.5 percent of gross domestic product next year from 4 percent in 2013, Najib said in his annual budget on Oct. 25. The economy will expand 5 percent to 5.5 percent in 2014 from an estimated 4.5 percent to 5 percent in 2013, according to the finance ministry’s economic report issued the same day.

“The goods and services tax is being seen as a fiscally responsible move and this will enhance the investment appeal of Malaysia,” said Nick Verdi, a foreign-exchange strategist at Barclays Plc in Singapore. “The budget was taken pretty favorably by markets.”

The ringgit rose 0.7 percent to 3.1355 per dollar in Kuala Lumpur, according to data compiled by Bloomberg, the biggest increase since Oct. 17. It earlier touched 3.1232, the strongest level since June 17. The yield on the sovereign bonds due March 2023 held at 3.59 percent, the lowest level since July 8.

The government also cut subsidies on sugar last week after raising fuel prices in September to rein in the deficit that’s been running 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.

Current Account

Malaysia’s debt-to-GDP level 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 measured action plans demonstrate the government’s conviction to strengthen its fiscal health to avoid the risk of ratings downgrades” and should help to ease concerns about the nation’s financial position, Lee Heng Guie, an economist at CIMB Group Holdings Bhd. in Kuala Lumpur, wrote in an Oct. 26 research note.

The government’s restatement of its commitment to lowering the deficit and the introduction of GST are potentially constructive steps, although execution is key, Fitch analyst Andrew Colquhoun said in a statement today. The measures would be credit positive if fully implemented, although structural fiscal weaknesses and policy execution risks remain, Moody’s Investors Service analyst Christian de Guzman wrote in a report today.

‘Bullish Outlook’

The current-account surplus may narrow to 26.6 billion ringgit ($8.5 billion) this year from 57.3 billion ringgit in 2012, according to the finance ministry report.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, fell 42 basis points, or 0.42 percentage point, to 7.9 percent. The cost to insure Malaysian government debt using five-year credit-default swaps was little changed at 108.8, the lowest level since Oct. 17, CMA prices show. That’s down from 131.5 at the end of last month.

The government will cap debt service charges at below 15 percent of revenue and total federal government debt within 55 percent of GDP to make sure its finances remain healthy, the finance ministry said in its report.

The budget “will translate to a bullish outlook for the ringgit,” Malayan Banking Bhd. analysts led by Saktiandi Supaat in Kuala Lumpur, wrote in an Oct. 25 research note.

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