Ringgit crashes to 17-year low as fund outflows continue

Singapore

MALAYSIA's confidence-sapping crisis plunged to a new level on Wednesday with the ringgit smacked down to beyond the RM4/USD mark for the first time in 17 years and the KLCI equities benchmark tumbling to a 32-month low.

The ringgit plummeted to a low of 4.0375 against the US dollar on Wednesday, raising once again the spectre of the harrowing 1998 Asian financial crisis. Against the Singapore dollar, the ringgit has slipped over 7 per cent this year to 2.8590 on Wednesday.

Rising distress over the country's macro and political state has whiplashed Bursa Malaysia with the index having plunged 5.8 per cent since Malaysian Prime Minister Najib Razak fired his deputy and the attorney-general in late July and installed a new cabinet to consolidate his grip over the leadership.

"There's nothing different", was the cryptic response from a top banker on what had led to the ringgit's near free-fall this week to depose the Indonesia rupiah of the unenviable title of being the worst performing currency in the region this year.

"The ringgit's travail is well documented . . . these have not changed," said Macquarie Bank's head of fixed income and currency strategy, Nizam Idris.

The twists and turns in the country's protracted scandal involving troubled 1Malaysia Development Bhd plus other chinks in the battered armour of one of South-east Asia's largest economies - waning exports, commodities slump and slipping domestic demand - are not fresh woes.

Staggering amounts have fled the country's capital markets on the back of an imminent rate hike in the US, with some RM12 billion (S$4.2 billion) in equities and RM19 billion of bonds having been net sold in the first half of this year. And the offloading continues.

But two new negative factors have joined the ringgit rout - China's surprised yuan devaluation which could hurt commodity exporters such as Malaysia and the drop in Malaysia's international reserves to below US$100 billion in July, the lowest in almost five years, presumably due to Bank Negara's move to defend the ringgit.

"The rapid fall in Malaysia's reserves leaves the central bank with limited ammunition to combat pressure for the currency to weaken," said Mr Nizam, who has adjusted his RM/USD forecast to 4.05.

The ringgit's sharp fall took place ahead of Malaysia's release of its second-quarter GDP data on Thursday which most economists say will signal a slowdown caused mainly by a tepid trade performance and weak domestic consumption.

That would be hard to stomach, considering the country's stunning performance in the first quarter of 5.6 per cent growth, one of the top Asean performers over the period.

"The ringgit's rapid slide will eventually bite into consumption as higher imported cost feed into the pricing system," said Kuala Lumpur-based independent economist Lee Heng Guie, who expects the ringgit to head further south between RM4 and RM4.20 against the US dollar.

He expects the cascading effect of April's newly-introduced goods and services tax to crimp consumer spending, which has already weakened due to income worries - about 10,000 people have been retrenched as at July - and weakened private investment.

While a weak ringgit is typically a boon to export competitiveness and the services sector including tourism, none of that may be felt this time with China's yuan devaluation and the tourism sector still reeling from three air disasters last year.

The Malaysian currency needs a "positive domestic story" to stabilise but that remains elusive, which means it is hard to see a near-term escape, said Mr Nizam.

Mr Lee agrees: "The ringgit is at the mercy of loss of confidence, global events (prospects of higher US interest rates) and domestic macro concerns surrounding the ongoing 1MDB investigation and political uncertainty. There are indications that the current uncertainty could drag on and it does not bode well for investor sentiments."

To what extent the central bank will deploy its foreign reserves to prop up the falling currency and whether the country may revisit the idea of capital controls like it did back in 1998 are likely to be key questions to be lobbed at central bank governor Zeti Akhtar Aziz at a press conference on Thursday to release the GDP numbers. But the toughest queries the well-respected governor may have to confront will be related to the 1MDB probe involving the alleged funds transfer into Mr Najib's personal accounts, a matter that Bank Negara is also investigating.

Dr Zeti has been silent since former AG Gani Patail was sacked nearly three weeks ago and the offices of the anti-graft agency were raided with rumours swirling that she too may be under pressure to step down.

For that reason, observers expect a record media turnout at the event.

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