Ringgit slips further as oil price, business and consumer sentiments dip

Kuala Lumpur

THE Malaysian ringgit slipped to 3.865 on Tuesday on sliding oil prices and negative sentiments over the debt-ridden strategic investment company 1MDB.

Amid this, a second-quarter survey by an independent think-tank indicated further deterioration in business and consumer confidence.

The business confidence poll by the Malaysian Institute of Economic Research (MIER) showed the downturn in business confidence to be especially sharp. MIER's business conditions index or BCI registered 95.4 points, a dip from the 101 points in the January-to-March quarter.

MIER's consumer confidence index registered 71.7 points in the second quarter, down from the preceding quarter's 72.6 points - which was itself a six-year low. Malaysian consumers, already anxious about rising daily living expenses, are expected to rein in their spending.

Things were rosier in the first quarter. Businesses had reported healthy sales, and with the growth in domestic and export markets, had anticipated business activities to accelerate in the April-to-June period.

Whether the strong sales came from "front-loading" by consumers ahead of the implementation of the 6 per cent consumption tax in April, demand has since reversed; the BCI has showed a further dip in capacity-utilisation rates.

As is the case in a number of markets, Malaysia's exports have weakened in recent months due to softer global demand; June's data is due on Wednesday and analysts expect a contraction.

Business operating costs have escalated dramatically on the back of a new minimum wage, power tariff hikes and the goods and services tax.

However, the ringgit's depreciation against the US dollar, Singapore dollar and other major currencies has probably had the greatest effect. The Malaysian currency shrank about 8 per cent against the US dollar last year and is down nearly 9 per cent this year.

MIER executive director Zakariah Abdul Rashid believes plummeting oil prices aside, the recent confidence deficit - particularly over how the authorities have handled investigations into 1MDB - and the recent Cabinet and political manoeuvrings have contributed to the ringgit's battering.

At an economic outlook conference on Tuesday, he warned that the currency could be further eroded if public and investor confidence are not quickly restored.

Notwithstanding Bank Negara's view that the ringgit is fundamentally undervalued - most analysts think it should be trading at around 3.7 - many Malaysians seem resigned to an even smaller ringgit in the coming months.

A recent report by The Star said the central bank has attempted to dissuade dealers from taking part in forward contracts or put options for the ringgit at 4.00 to the US dollar over a three- to six-month timeframe.

The Malaysian newspaper also reported that money changers were doing a roaring trade in US dollars and Singapore dollars; demand for them is high, with buyers expecting the ringgit to fall further.

It is telling that the local currency continued its slide on Tuesday despite 1MDB's claims that it had been cleared by the Malaysian Anti-Corruption Commission of providing funds to Prime Minister Najib Razak.

The lack of public buy-in was evident in the derision that came in the wake of the statements. A further erosion in confidence is expected in the ringgit's performance.

BNP Paribas said the central bank has used an estimated US$40 billion since April 2013 to shore up the ringgit; it was BNP Paribas that recently cautioned that Malaysia's deteriorating external finances could lead to a sovereign ratings downgrade.

Investors are keeping a close eye on its balance of payments, which is narrowing, as well as on its international reserves, which continue to head south.

As at July 15, Malaysia's international reserves amounted to US$100.5 billion. Mr Zakariah is concerned a fall below the psychological US$100 billion level could put additional pressure on the ringgit.

Notwithstanding the flagging economy, everyone appears riveted by the 1MDB saga, especially after TheWall Street Journal, citing government investigation documents, reported that nearly US$700 million had been channelled into Mr Najib's personal bank accounts in Ambank. Following the report in early last month, Mr Najib said he had not used any of the money for personal gain. Last week, he indicated the funds were from political donors.