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[HONG KONG] Malaysia's ringgit, one of Asia's worst-performing currencies over the past year, has further to fall, according to BMI Research.
One reason is because it is affected by the yuan, which is going to remain under downward pressure, BMI said in a Jan 4 note. There will also likely be a narrowing of real interest-rate differentials between the US and Malaysia, with the latter probably staying on hold this year while the Federal Reserve increases rates by a total of 50 basis points. Further weakness in the global bond market would also put the ringgit under pressure given that around 40 per cent of Malaysian bonds are held by foreigners.
BMI has lowered its forecast for the ringgit. It expects it to average 4.50 per US dollar this year and 4.40 in 2018, from 4.00 and 3.88 previously. The currency, which fell 4.3 per cent against the greenback last year and 18.5 per cent in 2015, hasn't posted an annual gain since 2012.
"The Chinese economy remains mired in a medium-term slowdown as the structural weaknesses such as overcapacity in the industrial sector and dominance of inefficient state-owned enterprises persist," the note said. "Given that China is Malaysia's largest export partner, we believe that Malaysia's export-driven economy remains exposed and is likely to be negatively impacted."
The ringgit is, however, likely to claw back some losses over the longer term, supported by the rising price of commodities such as oil and improving terms of trade, which will be positive for domestic savings and investment, BMI said. Malaysia's relatively positive fiscal position relative to the US should also keep inflationary pressure subdued, it said.
The risks to BMI's view are to the downside. If the Fed increases rates faster than expected it could lead to higher outflows from Malaysia and put the ringgit under greater pressure.
Donald Trump's presidency also raises the likelihood of a global trade slowdown, while Malaysia's export sector would suffer if additional protectionist measures are imposed, it said.