SINGAPORE: The Malaysian ringgit has borne the brunt of the recent emerging market selloff, extending last year’s losses that already made it one of Asia’s worst performing currencies.
The latest rout, triggered by American businessman Donald Trump’s win at the US presidential election, has seen the currency fall nearly 7 per cent since Nov 9. On Thursday (Dec 1), the greenback fetched as much as 4.4705 ringgit, its highest level since September 2015.
Mr Trump’s victory has fuelled expectations for the roll-out of fiscal stimulus proposals such as tax cuts that would bolster economic growth and inflation, therefore forcing the US Federal Reserve to step up the pace of interest rate hikes.
As a result, the US dollar strengthened against most global currencies and yields on US Treasurys spiked, sending investors to readjust their positions out of emerging markets.
But why is the ringgit being hit particularly hard compared to its emerging market peers? Given the recent hammering, could capital controls possibly be on the cards? For its closest neighbour Singapore, what are the spillover effects? We ask analysts.
Q: Why is the ringgit the biggest loser within Asian emerging markets?
This is due to the high foreign ownership of Malaysia’s government bond market, which leaves the Southeast Asian country extremely vulnerable to capital outflows. According to a Reuters report, foreigners owned more than 40 per cent of Malaysia’s government debt, the highest percentage in Asia.
“We estimate that at least US$55 billion worth of Malaysian bonds are held by foreigners or non-residents. Whenever there is a global rotation of funds, there will always be more pressure on countries like Malaysia,” explained Mr Nizam Idris, head of forex strategy at Macquarie Bank.
The central bank’s recent move to clamp down on currency speculators probably rattled foreign investors further, said Mr Julian Wee, senior markets strategist for Asia at National Australia Bank (NAB).
Last week, Bank Negara Malaysia (BNM) requested foreign banks to commit to stop the trading of ringgit in the offshore non-deliverable forwards (NDF) market. Prior to that, it also confirmed that it had intervened in the currency markets to defend the ringgit. These have spurred concerns about the regulator’s handling of the markets and raised the spectre of capital controls that were last seen during the Asian financial crisis nearly two decades ago, analysts said.
While the BNM has since issued “a categorical disavowal” on the revival of capital controls, speculation will likely continue, said Mr Wee.
On top of that, the Malaysian currency continues to be pressured by a toxic combination of long-standing threats - fluctuations in the price of crude oil, depleting foreign exchange reserves, slowing economic growth and a protracted political crisis over 1MDB.
Interestingly, the jump in oil prices on Thursday following the OPEC’s surprise decision for a joint output cut, offered little reprieve for the ringgit.
“Malaysia is a net oil exporter so falling oil price has been an issue, especially when its current account surplus has plunged over the last few years,” said Mr Nizam, noting that the country’s current account surplus has narrowed from 16 per cent in 2009 to 2 per cent at the moment.
“But on Thursday, funds are still flowing out even with the significant jump in oil prices. That shows it's not just about oil anymore. Everything else is adding up to the weakening confidence."
Buyers in Singapore are taking the opportunity to pick up ringgit on the cheap. (REUTERS/Edgar Su)
Q: How long will this ringgit rout last?
It is anybody’s guess, according to analysts that Channel NewsAsia spoke to. But given weak fundamentals, the consensus seems to be that the currency will continue to underperform its regional peers.
“It’s very telling that the ringgit has underperformed the rupiah and even the won, given the domestic difficulties in South Korea now. I think that shows quite clearly that underlying confidence in Malaysia’s fundamentals is not strong,” said NAB’s Mr Wee.
The recent targeting of NDF trading may exacerbate these concerns, he added.
“The move, and its subsequent failure to meaningfully alleviate the pressure on the ringgit, could well focus the market’s attention on Malaysia’s underlying weakness. Most worrying is that foreign exchange reserves might be a little thin in the event of a surge in near-term outflows should panic ensue.”
Mr Paul Mackel, head of emerging-market foreign exchange research at HSBC, said he has to “turn negative on the ringgit now” and expects the dollar-ringgit pair to tick up in the coming months, likely breaching the 4.48 peak set last September.
“We expect MYR depreciation pressures could intensify around BNM bills and MGS (Malaysian Government Securities) bond redemptions, for example, during February, March and June in the first half of 2017,” Mr Mackel wrote in a note dated Dec 1.
Q: Weak ringgit: Good or bad for Malaysia’s economy, businesses?
In theory, a weaker currency is usually perceived as a tailwind for the economy as exports get a leg-up in competitiveness.
For Malaysia, the depreciation of the ringgit has helped to support export earnings in local currency terms, with exports from the key electronics sector seeing positive growth in 2015 and 2016, according to Mr Rajiv Biswas, Asia-Pacific chief economist for IHS Markit.
For export-oriented businesses like Top Glove, a limp currency is seen as a “welcome bonus”, executive chairman Tan Sri Dr Lim Wee Chai said in an e-mailed reply to questions from Channel NewsAsia. “About 95 per cent of our revenue is denominated in USD while most of our costs are in ringgit, hence a stronger USD or a weaker ringgit has generally always augured well for us in terms of revenue and margins,” he said.
But the world’s biggest rubber-glove maker is not relying on currency fluctuations to boost its performance. Apart from being a temporary factor, a weaker ringgit translates into higher procurement cost for materials such as nitrile that are denominated in US dollars.
Intensifying price pressure within the competitive industry could also mean that the company, which is listed in both Malaysia and Singapore, may have to lower its selling price if its competitors start doing so.
“A weaker ringgit will also adversely impact the economy hence we still prefer a stable currency which will be better for businesses and our country in the long run, and also reduce uncertainty and speculation,” Top Glove’s chairman added.
Similarly, economists also warned that a weaker ringgit has its fair share of negative implications. For one, it raises the cost of servicing the country’s external debt burden, said Ms Krystal Tan, an Asia economist from research firm Capital Economics.
“Malaysia has a fair amount of foreign currency debt so that would make it hard for BNM to cut rates further even though the economy could use more support,” she said. “Given that there is also adequate concerns about the weakness in the ringgit, cutting rates to trigger further falls in the currency isn’t something that they would want now.”
Malaysia's gross domestic product grew 4.3 per cent in the third quarter compared from a year ago. (AFP/Jimin Lai)
Q: So what options does the central bank have?
The most prudent option is to let the ringgit continue to move according to market forces, analysts told Channel NewsAsia.
Apart from having little room to manoeuvre on its policy settings, the central bank also has receding ammunition to defend the ringgit. BNM said foreign currency reserves stood at US$98.3 billion as of Nov 15, about a third below the record US$141.4 billion reached in 2013.
“At this juncture, aggressive deployment of foreign exchange reserves (already perceived by some as relatively low) to smooth MYR depreciation may potentially backfire and undermine confidence, especially among residents,” noted HSBC’s Mr Mackel.
In that case, will more extreme forms of capital controls such as a fixed currency regime be revived? During the depths of the Asian financial crisis, former Premier Mahathir Mohamad imposed capital controls and pegged the currency at 3.8 against the US dollar after the ringgit slumped to a record 4.8850 per dollar.
While there could be a possibility given the falling foreign exchange reserves, Macquarie’s Mr Nizam ruled it out as an immediate risk if “the lesson (from the targeting of NDF market) is taken on board”.
“When you scrutinise and control cross-border movement of money, that is a shade of capital controls and what they've done in recent time has shaken up investor confidence again,” he said.
Mr Wee from NAB agreed, noting that it could incur a “counter-productive effect”. “It’s not something you want to count on because it reduces confidence quite dramatically and to depeg the currency may take some time."
"The last time they did it, it took them seven years before they managed to do so and they were lucky then because Asia was on the rise; inflows entered the country once they depegged,” he said.
Q: What does it mean for neighbouring Singapore?
On Thursday, the ringgit was seen trading at 3.1239 per Singapore dollar, near the record 3.1378 set on Nov 28. During the Asian financial crisis, the most one Sing dollar could fetch was 2.45 ringgit in June 1998.
Naturally, manufacturers and businesses that have to pay for imports from Malaysia, as well as Singapore’s consumers, stand to benefit from a cheaper ringgit.
Mr Albert Teng, who spent close to 2,000 ringgit on his most recent one-day trip to Johor Bahru, said: “It’s about value for your money at the end of the day when things that you can get here have become much cheaper in Malaysia. Furthermore, Chinese New Year is coming so I think more Singaporeans will want to do their shopping there.”
“Even with the higher toll charges for cars, the value is still there,” added the 62-year-old.
A money changer seen counting Malaysian ringgit bank notes. (Photo: AFP/Tengku Bahar)
On the flip side, a weakening ringgit underlies slowing economic growth in Malaysia. Given that Malaysia remains one of Singapore’s top trading partners and biggest export market, there could be negative spillover effects for the Singapore economy.
“The moderation in Malaysia's GDP growth from 6 per cent in 2014 to 4 per cent in 2016, the slowdown in export growth as well as domestic demand have had negative transmission effects to the Singapore economy,” said IHS Markit’s Mr Biswas. Singapore's non-oil domestic exports to Malaysia declined 7.5 per cent year-on-year in October, after slumping 12.3 per cent in the previous month.
“With Singapore's economy having stalled in the first three quarters of 2016, the moderation in Malaysia's GDP growth in 2016 has added to the economic headwinds impacting on Singapore,” he said.
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