Malaysia central bank seeks to cool political noise on ringgit

[KUALA LUMPUR] Malaysia's central bank sought to depoliticise the debate over the weakening ringgit, releasing a rare statement urging the country to resolve domestic issues that have affected the currency.

Referring to "recent inaccurate and misleading media reports" on the central bank and the ringgit's volatility, Bank Negara Malaysia said it won't be drawn into any political agenda and remains focused on maintaining monetary and financial stability.

The statement late Thursday came a day after Deputy Finance Minister Ahmad Maslan said central bank information indicated former leader Mahathir Mohamad's criticism against Prime Minister Najib Razak was one reason behind the ringgit's weakness. The comments were made in parliament and reported in local media.

The ringgit, Asia's second-worst performing major currency against the dollar this year, has become a subject of debate among politicians as Najib faces persistent criticism over his management of the economy. Much of that has focused on 1Malaysia Development Bhd, a state investment company set up more than five years ago to build infrastructure that has drawn attacks from lawmakers for its borrowing levels.

"Bank Negara is telling markets to look beyond the political noise and the current market volatility, as fundamentals remain sound," said Vishnu Varathan, a Singapore- based economist at Mizuho Bank Ltd. "The other message is that Bank Negara is apolitical as it is a highly professional and sound central bank."

"The central bank wishes to reiterate that the current movements of the ringgit are affected by both global and domestic developments," Bank Negara said on its website.

"Global developments would include the investor expectations relating to monetary policies of major central banks and the trends in crude oil and gas prices. Domestic factors include concerns about government-linked entities and ratings related issues."

The ringgit has declined more than 6 per cent this year. On June 8, it dropped to 3.7743 to the dollar, the weakest since January 2006, according to data compiled by Bloomberg.

"While external developments are beyond the control of any open economy, every effort needs to be undertaken to bring about resolution to the domestic issues that confront our economy," Bank Negara said. "Once these issues are resolved the performance of the currency is expected to be consistent with our sound economic fundamentals and growth prospects."

The central bank is right in that the currency is driven by macro-economic forces and market forces, said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Group Ltd. in Singapore.

"In itself, the political noise is not a significant factor for the ringgit," he said. "But Mahathir's comments basically bring the focus to 1MDB slightly more than what it could have been. It leads the market to think about potential contingent liabilities on the government and therefore a potential downgrade on Malaysia's rating."

BLOOMBERG