Fitch Deficit Warning Compounds Ringgit Woes as Fed Hike Nears

  • Ringgit's first monthly advance since April to be short-lived
  • Fitch says Malaysia may miss 2016 deficit reduction target

The ringgit led a decline among Asian currencies this week as Fitch Ratings’ warning that Malaysia may miss its fiscal deficit reduction target added to concern higher U.S. interest rates will spur more capital outflows.

Malaysia’s 2016 budget shortfall could exceed Prime Minister Najib Razak’s estimate of 3.1 percent of gross domestic product due to falling commodities, Fitch said in a statement Tuesday as the government seeks to lower the gap to 3.2 percent this year. The currency is Asia’s worst performer in 2015 as slumping Brent crude cuts revenue for the oil exporter. While the ringgit is poised for its first monthly gain since April, ABN Amro Bank NV and Australia & New Zealand Banking Group Ltd. say the rally will be short-lived.

“Najib’s budget wasn’t enough to really boost investor confidence, especially in light of recent comments from Fitch,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “Malaysia certainly stands to be one of the most vulnerable within Asia in the event the Federal Reserve does hike rates.”

The ringgit fell 1.8 percent this week to 4.2987 a dollar in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. It was little changed Friday. While the currency has strengthened 2.2 percent in October, it’s down almost 19 percent for the year.

Interbank Deposits

Bank Negara Malaysia started taking in interbank dollar deposits for the first time in September, a move that Macquarie Bank Ltd.’s head of currency and fixed-income strategy Nizam Idris said will help stabilize foreign-exchange reserves as it reduces the need for the central bank to intervene.

The holdings dropped below the $100 billion mark in July for the first time since 2010. They have since recovered slightly but are still down 19 percent this year at $94.10 billion.

Bank Negara is accepting deposits in small amounts, according to a person familiar, who asked not to be identified because of company policy. The move will help build up the country’s currency reserves, two other people said. The monetary authority said in response to questions that it’s encouraging financial institutions, including branches of overseas banks, to keep foreign-currency earnings and deposits of Malaysian-based companies in the domestic market.

Overseas investors were net buyers of the nation’s stocks for a third week through Oct. 23, purchasing 230.4 million ringgit ($54 million) and reducing outflows this year to 16.9 billion ringgit, according to a report from MIDF Amanah Investment Bank on Monday. That still exceeds the 6.9 billion ringgit for the whole of last year.

Malaysia’s five-year government bonds retreated this week, with the yield rising four basis points to 3.73 percent, according to prices from Bursa Malaysia. The 10-year yield fell three basis points to 4.13 percent.

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