Slide in Malaysia's reserves adds pressure to ringgit and ratings

Kuala Lumpur

MALAYSIA'S international reserves continued to slip, tumbling to US$96.7 billion as at July 31. The deteriorating finances is expected to put additional pressure on the ringgit - already at a 17-year low against the US dollar - and its current A- sovereign rating.

The US$3.8 billion reduction in two weeks from US$100.5 billion to below the psychological US$100 billion level could see the ringgit slide towards 4.00 to a US dollar - an occurrence that some project could happen as early as next week. Prior to the release of the data by Bank Negara on Friday evening, RHB Investment Bank senior economist Peck Boon Soon said that should reserves continue to fall, "confidence levels will drop", adding that the reserve coverage of 1.1 times short-term external debt was a little tight.

Already feeble, the ringgit had a torrid week, losing a massive 2.4 per cent against the US dollar to take its loss to 12.3 per cent year to date, marking it as the region's worst performing currency. The ringgit's volatility has prompted talk that capital controls could be next - the currency was pegged at 3.8 to the dollar as part of currency controls in 1998 during the Asian financial crisis and only lifted in 2005 - even though government officials have ruled it out.

Despite the precipitous fall to 3.926 to the US dollar on Friday - a new 17-year low - and around 2.82 to the Singapore dollar, the ringgit continues to face an uphill battle against increasingly bearish sentiments on the back of a flagging economy and political problems. In addition to a renewed slide in global oil prices to below US$50 a barrel, a looming rate hike by the US Federal Reserve could lead to more outflows as funds head back to improved yielding assets.

Still, many funds - portfolio in particular - have been motivated to leave because of the manner in which Prime Minister Najib Razak and his administration have dealt with official investigations into scandal-ridden and debt-laden 1MDB. Various allegations have surfaced about the state-owned company, including that some US$700 million was channelled into Mr Najib's personal bank accounts.

Despite the Malaysian Anti-Corruption Commission's findings that the funds from an overseas account were political donations - the donor or donors have yet to be revealed - few outside of Mr Najib's inner circle in Umno are convinced.

In any event, the ringgit continues to bear the brunt of scepticism over the entire fiasco - which has also tarnished Malaysia, and the rush to exit has noticeably accelerated in recent weeks. In all, nearly RM12 billion (S$4.2 billion) of portfolio funds are estimated to have left compared to almost RM7 billion for the whole of last year. Because foreigners still hold some 47 per cent of Malaysian government securities, the market is watching the segment nervously. Mr Peck said that the ringgit selloff has been sharper than the central bank would have liked, but with Malaysia's international reserves shrinking to current levels from a high of some US$140 billion in 2010, it does not have much leeway to intervene.