The region’s biggest loser in the past month, the Malaysian ringgit is faced with the prospect of another cut in interest rate.
In fact, analysts expect the currency to drop by over two percent by year-end.
The slide in ringgit underscores the fact that all is not well as the country’s economy heads for its worst performance in ten years. The plunge in crude oil prices this week undermines the finances of Malaysia, while the appeal of its relatively high bond yields is tempered by the scandals surrounding the state investment fund.
With this, UBS Group AG and Rabobank Group expect another rate cut from Bank Negara Malaysia in the coming months.
Another rate reduction “will be a further negative for the currency because one of the things that’s attractive about it is it’s got a relatively high yield,” said Michael Every, head of financial markets research at Rabobank in Hong Kong.
“They’ve been extremely stable on the interest-rate front up until the last cut. If we get another one, it will get the market thinking: ‘What do they know that we don’t?’”
Brent Crude’s 13 percent drop this quarter is eroding Malaysia’s export earnings while rising costs curb business investment. Economic growth moderated to the least in over six years in Q1, and analysts forecast it to ease to 4.2 percent this year.
Notably, the currency’s outlook is linked to oil prices since 20 percent of the country’s revenue is derived from energy-related sources. In April, the prime minister said Malaysia loses RM450 million in annual income for every US$1 drop in oil prices.
In the past month, the ringgit fell 1.3 percent, underperforming regional peers which all posted gains except for Indonesia’s rupiah and the Philippine peso.
As of 11:11 am in Kuala Lumpur on Thursday, it traded at 4.052 per dollar, after trading at 3.142 in August 2014, when oil was priced at more than US$100 a barrel.
Based on median estimates of analysts surveyed by Bloomberg, the currency will ease to 4.10 per dollar by end-September and 4.15 by year-end. Taking a more bearish stance, Rabobank expects the ringgit to stand at 4.15 by 30 September and 4.30 by end-December, said Every.
On 13 July, Bank Negara unexpectedly slashed its benchmark interest rate by a quarter point to three percent in a bid to bolster growth, and analysts reckon that pressure is building for another cut.
UBS expects Bank Negara to take another quarter-point rate cut early next year, bringing the ringgit to 4.40 per dollar by end-December. Three-year bonds yield five basis points less compared to central bank rate, indicating that investors expect more easing.
“Malaysian export growth continues to be weak, a common problem among emerging-market economies, and the current-account surplus is expected to narrow further, which could put pressure on the currency when portfolio inflows slow,” said Maximillian Lin, a currency strategist at UBS in Singapore.
JPMorgan Chase & Co expects the ringgit to stay between 3.90 and 4.10 per dollar in 2H 2016 as investors are attracted to the country’s relatively high bond yields. The scenario will only be threatened once the Federal Reserve decides to raise interest rates at the same time when Bank Negara lowers them, said its foreign-exchange analysts.
“If the Fed outlook was fairly benign it’s not likely that another rate cut would hurt ringgit sentiment all that much,” commented Jonathan Cavenagh, head of Asia emerging-market currency strategy at JPMorgan Chase in Singapore.
“Outright yields are still quite high, particularly compared to the major developed markets. Hence we would expect limited downside in the ringgit.”
Although the country’s bonds provide the second-highest interest payments in Southeast Asia, their allure are already fading. This comes as yield on the benchmark 10-year security fell from 4.45 percent in August 2015 to 3.62 percent on Thursday.
“High foreign participation in the local currency bond market, we estimate 34 percent of outstanding Malaysian government securities are owned by foreigners, makes the ringgit very sensitive to the Fed outlook and to domestic political developments,” said Lin of UBS.
Mangalesri Chandrasekaran, Editor at PropertyGuru, edited this story. To contact her about this or other stories email mangales@propertyguru.com.my
