No rest for Malaysia: Investors seek fixes beyond Fitch approval

[KUALA LUMPUR] A rally in Malaysia's currency and stocks after the nation avoided a Fitch Ratings downgrade may be short- lived if it doesn't clean up an indebted state investment company and reduce threats to its current-account surplus.

The ringgit will probably still weaken to 3.8 against the dollar by the end of this year, according to Credit Suisse Group AG and United Overseas Bank Ltd. Malaysia would be among the most fragile nation's in the region should a recovery in the euro area stall because of Greece, Credit Suisse says.

"Continued weakness in the ringgit is perhaps the best barometer of sentiment towards Malaysia and the ringgit continues to hover near its post Asian Financial Crisis peg of 3.80," Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd, wrote in a note Wednesday. "Malaysia continues to be caught in changing domestic and external cross- currents." Before Wednesday's market rebound, foreign funds had been cashing out of the Malaysian stock market at the fastest pace in Asia this year, while the ringgit had weakened to the lowest level in a decade. Investor confidence has been battered by growing scrutiny on Prime Minister Najib Razak's management of debt-ridden 1Malaysia Development Bhd, as well as faltering export and state revenue after commodity prices slumped.

The challenge is to ease investor concerns quickly enough to prevent an exodus of funds whenever the US Federal Reserve starts to raise interest rates.

"Foreign investors will likely be uninterested in Malaysia until we see improvements in the negative factors" which include 1MDB and weak corporate earnings growth, said Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management, which oversees about US$112 billion. He spoke a day before Fitch affirmed Malaysia's credit rating on June 30. "It's a maelstrom of adverse developments." Malaysia has taken steps to pare down 1MDB's debt of 41.9 billion ringgit (S$14.9 billion) as of March 2014 and is winding down the company's operations through possible sales of land and power assets. The government has explicit guarantees for 5.8 billion ringgit of 1MDB debt, and Fitch said there is a "high probability that sovereign support for 1MDB would be forthcoming if needed." "Malaysia will need to better control its off-balance sheet liabilities and improve its governance standards," Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore, said before the Fitch decision. "Having a public debt ceiling of 55 per cent of GDP is pointless, if the limit is sidestepped with government guarantees and support letters." Mr Najib chairs 1MDB's advisory board, and he resisted calls from former Prime Minister Mahathir Mohamad to step down as the country's leader over the debacle.

Keeping the current account in surplus will also be key to boosting confidence in Malaysia, said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp. With Southeast Asia's third-largest economy running a fiscal deficit starting from 1998, Najib in January tried to pre-empt concerns about the possibility of a current-account gap as well.

He unveiled measures that may keep more money in the country including encouraging government-linked companies to invest domestically and increasing local goods and services in government procurement.

"Investors realising that Malaysia will not go into twin deficits is likely to lead to a recovery in the currency, international reserves and funds flow," said Gerald Ambrose, who oversees the equivalent of US$3.6 billion as managing director of Aberdeen Asset Management in Kuala Lumpur.

A possible complication: this year, Indonesian and Malaysian governments and companies have sold more foreign- currency debt than they did in the whole of 2014 as a global bond rout pushes up yields and their currencies weaken. That raises concern it will become costlier for them to service foreign-currency debt as the dollar gains.

The ringgit fell to 3.7887 per dollar Monday, near the 3.8 level the currency was pegged at from 1998 to 2005. It closed 0.7 per cent higher Wednesday after Fitch also raised its outlook on the sovereign to stable from negative.

BLOOMBERG