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No break for ringgit as clouds gather over Malaysia
[KUALA LUMPUR] The bad news just doesn't stop for Asia's worst-performing currency.
Already reeling from a renewed slump in oil prices and a political scandal that just won't go away, the Malaysian ringgit is now facing the prospect of another cut in interest rates. It's the region's biggest loser in the past three months and analysts still see scope for it to drop more than 2 per cent by year-end.
The currency's slide highlights all is not well as the nation's economy heads for its worst performance this decade. Crude oil's plunge to a four-month low this week undermines the finances of net oil exporter Malaysia.
And the appeal of its relatively high bond yields is being tempered by the scandals surrounding a troubled state investment fund. Rabobank Group and UBS Group AG both predict Bank Negara Malaysia will add to its first rate cut in seven years in coming months.
Another rate reduction "will be a further negative for the currency because one of the things that's attractive about it is it's got a relatively high yield," said Michael Every, head of financial markets research at Rabobank in Hong Kong.
"They've been extremely stable on the interest-rate front up until the last cut. If we get another one, it will get the market thinking: 'What do they know that we don't?'"
Brent crude's 13 per cent slump this quarter is exacerbating Malaysia's woes. Sliding energy prices have eroded export earnings and rising costs are curbing business investment. Economic growth slowed to the least in more than six years in the first quarter, and analysts project it will ease to 4.2 per cent for the year as a whole, the least since 2009.
The outlook for the currency is linked to oil prices as Malaysia derives 20 per cent of its revenue from energy-related sources. The nation loses 450 million ringgit in annual income for every $1 decline in oil, the prime minister said in April.
The ringgit has dropped 3.3 per cent in the past three months, outpacing declines of 2.1 per cent in China's yuan and 0.8 per cent for India's rupee. The currency closed at 4.0630 per US dollar on Wednesday, after being as strong as 3.142 in August 2014, when oil was still above US$100 a barrel.
The ringgit will weaken to 4.10 per US dollar by the end of September and 4.15 by year-end, according to the median estimates of analysts surveyed by Bloomberg. Rabobank is more bearish, predicting 4.15 by Sept 30 and 4.30 by the end of December, Mr Every said.
Bank Negara unexpectedly cut its benchmark interest rate by a quarter point to 3 per cent on July 13 to bolster growth, and analysts say pressure is building for another move.
July's easing was a "pre-emptive move" and there are no current plans to adjust rates again over the next few meetings, although policy makers will look at data to see what is needed, central bank Governor Muhammad Ibrahim told the official Bernama news agency in an interview published July 14.
UBS projects the central bank will make another quarter- point rate cut by early next year and the ringgit will weaken to 4.40 per US dollar by the end of December in anticipation. Three-year bonds yield 5.5 basis points less than the central bank rate, signaling debt investors see chances for further policy easing.
"Malaysian export growth continues to be weak, a common problem among emerging-market economies, and the current-account surplus is expected to narrow further, which could put pressure on the currency when portfolio inflows slow," said Maximillian Lin, a currency strategist at UBS in Singapore.
Sentiment towards the economy has soured as global probes into 1Malaysia Development Bhd gathered pace, raising the stakes in a scandal which has dogged Prime Minister Najib Razak for more than a year.
1MDB is at the centre of a controversy involving accusations of embezzlement and money laundering. It defaulted on a US$1.75 billion bond in April amid a dispute with the co-guarantor as to who was liable for the payment.
US prosecutors said on July 20 they're looking to recover more than US$1 billion in assets they contend were siphoned from 1MDB, whose advisory board Mr Najib chaired until recently.
The Monetary Authority of Singapore announced a day later it had seized S$240 million in assets from individuals linked to alleged fraud at the fund. Mr Najib and 1MDB have both denied wrongdoing.
Not everyone is bearish.
JPMorgan Chase & Co predicts the ringgit will stay between 3.90 and 4.10 per dollar in the second half as Malaysia's relatively high bond yields attract investors. That scenario would only be threatened if the Federal Reserve were to raise interest rates at the same time as Bank Negara cuts them, its foreign-exchange analysts say.
"If the Fed outlook was fairly benign it's not likely that another rate cut would hurt ringgit sentiment all that much," said Jonathan Cavenagh, head of Asia emerging-market currency strategy at JPMorgan Chase in Singapore.
"Outright yields are still quite high, particularly compared to the major developed markets. Hence we would expect limited downside in the ringgit."
While Malaysian bonds offer the second-highest interest payments in South-east Asia after Indonesia's, they are losing their allure. The yield on the benchmark 10-year security dropped to 3.60 per cent at the close of trading Wednesday, from as high as 4.45 per cent in August 2015.
"High foreign participation in the local currency bond market, we estimate 34 per cent of outstanding Malaysian government securities are owned by foreigners, makes the ringgit very sensitive to the Fed outlook and to domestic political developments," UBS's Mr Lin said.