Ringgit jumps most since 1973 to defy bears as oil eclipses 1MDB

[KUALA LUMPUR] Malaysia's oil exports have turned the ringgit into Asia's best-performing currency even as analysts say it's the least attractive.

Forecastersare predicting the ringgit will weaken 8.4 per cent this year for the biggest drop in the region, and some of them even see it falling beyond a 17-year low reached in September. The bearish calls peaked around the end of January, when Swiss investigators said a probe into state-owned 1Malaysia Development Bhd revealed about US$4 billion may have gone missing.

The ringgit has confounded those calls by surging 9 per cent this quarter, the most in 43 years. Oil's gains have been a big part of that - crude accounts for 22 per cent of Malaysian government revenue and the nation is Asia's only major net exporter - along with tax increases and spending cuts.

Now 1MDB is adding to the upswing, with the state-investment fund agreeing to sell energy assets and pledging to repay RM6 billion (S$2.03 billion) of debt in the coming weeks.

"The ringgit is going to be one of the outperformers in the region in 2016," said Divya Devesh, the Singapore-based foreign-exchange strategist for Asia at Standard Chartered Plc.

"We are looking for a good rebound in oil prices. The market is still short ringgit so we might see continued covering of positions, which should also be supportive."

As the Federal Reserve's willingness to be gradual in raising interest rates drove emerging-market currencies toward their best month in 18 years, the ringgit came to the fore, reaching a seven-month high of 3.9323 per US dollar on Wednesday.

Standard Chartered, with one of the most bullish of 28 forecasts compiled by Bloomberg, upgraded its second-quarter estimate to 4 per US dollar from 4.30 on March 22. That's based on projections Brent crude will rise above US$60 a barrel by year-end and the Fed will keep interest rates on hold for 2016. And it compares with prognoses from three strategists for it to weaken past the level of 4.48 per US dollar that it touched in September.

The ringgit's climb has come even as Prime Minister Najib Razak faces calls from former leader Mahathir Mohamad to quit over US$681 million that appeared in his accounts before the last election in 2013.

Strategists have trimmed their bearish ringgit forecasts by about 3.6 per cent for the three months through June from the end of January, with the currency's outlook largely resting on the sustainability of the rally in oil, gas and petrochemicals, which along with palm oil make up the biggest proportion of Malaysian shipments abroad after electronics. The nation's exports grew at less than half the 10-year average in 2015, when the currency's slide was compounded by the political scandal and 1MDB's debt.

Oil Bottoming

Macquarie Bank Ltd, the most accurate forecaster for the ringgit last year in Bloomberg rankings, has a June 30 estimate of 3.90 per US dollar. Nizam Idris, the bank's head of foreign-exchange and fixed-income strategy in Singapore, said that's more to do with potential weakness in the greenback than Malaysia's fundamentals. The projection compares with the 4.25 median estimate in Bloomberg's survey.

"Broadly, we feel that oil prices have bottomed and that is the key indicator," said Mirza Baig, Singapore-based head of Asia Pacific currency and interest-rate strategy at BNP Paribas SA, who sees the ringgit continuing to trade around 4 per dollar. "The other positive factor is the resumption of inflows to emerging markets."

RBC Bearish

Even after analysts raised their expectations for the currency, almost all are still calling for it to drop by year-end. Royal Bank of Canada is projecting a slide to 4.60 per US dollar by June 30. That would exceed the low reached in September, when the Swiss announced a freeze on assets linked to 1MDB and the New York Times reported that a federal grand jury in the US was investigating allegations of corruption linked to Mr Najib. The prime minister and the state firm have consistently denied any wrongdoing.

Mr Najib introduced a 6 per cent goods and services tax in 2015 and also maintainedhis deficit-reduction target in January. The growth forecast was cut to 4 per cent to 4.5 per cent from as much as 5 per cent.

1MDB raised RM9.83 billion via the sale of its energy assets to China General Nuclear Power Corp in March. The state-investment company won't have any more short-term debt and bank loans after the debt repayments, President Arul Kanda said in an interview in Kuala Lumpur on Wednesday.

Mr Najib maintains that the funds he received as a donation from Saudi Arabia's royal family weren't used for private benefit. Malaysia's attorney general Mohamed Apandi Ali cleared the premier of any wrongdoing in January, saying Mr Najib returned US$620 million in Aug 2013 that wasn't utilized, without specifying what the rest of the money was used for.

Former premier Mahathir and ex-deputy prime minister Muhyiddin Yassin were among those who addressed more than 2,000 people at a convention center in the capital Kuala Lumpur on Sunday as part of a campaign to oust Mr Najib.

"I would think a lot of the stability in the political situation has already been priced in," said Trang Thuy Le, a Hong Kong-based macro strategist at Credit Suisse Group AG, which raised its three-month ringgit forecast in March to 4 per US dollar from 4.30.

"Given the dovish tone of the Fed, we think that the dollar will likely continue to drift in the coming months and, because of the energy prices, Malaysian exports could be more resilient than we thought initially."

BLOOMBERG