By Sherilyn Goh
Amid the prolonged concern on the weakness of the ringgit, as the currency once again exploded into unprecedented weakness in the new year, ForexTime (FXTM) chief market analyst Jameel Ahmad said Bank Negara Malaysia (BNM) should raise interest rates to curb the ringgit from further currency losses.
“If BNM or other policymakers in Malaysia are truly concerned about prolonged currency weakness, then the option to raise interest rates is a path which they can take to protect the currency from further losses,” said the UK-based international foreign-exchange broker in a press statement released today.
Jameel’s comments came following Moody’s downgrade in Malaysia’s sovereign outlook from “positive” to “stable” yesterday to reflect changing economic conditions, which he said is not going to help with the potential for a reversal of momentum. This is compounded by escalated fears over the slowdown in the Chinese economy.
“Speculators are probably going to heighten calls for BNM to intervene and protect the currency from further losses, but what the market needs to understand is that the central bank simply does not have the reserves to be regularly doing this and it would once again only have a short-term impact on the currency.
“These are quite simply external factors that have returned to hurt the currency, and they have returned at an even more intense level than before with expectations being strong that China’s gross domestic product (GDP) growth is going to fall to a lowly-6% and that the price of commodities such as oil will drop to new milestone lows,” he explained.
BNM said on Thursday that reserves as of Dec 31 were US$95.3 billion (RM409.1 billion), sufficient to finance 8.5 months of retained imports. At the end of 2014, Malaysia had reserves of US$115.9 billion (RM511.52 billion).
Export effect subsiding
Jameel also pointed out that the support provided by a weak ringgit to export figures is believed to have been subsiding, after the trade data released by the Department of Statistics last week, which saw exports growth moderating to 6.3% year-on-year (y-o-y) in November, significantly lower from the 16.7% y-o-y growth registered in October.
This, he added, could fuel domestic concern amid a low global trade environment which could present a threat to further trade balance releases.
In November 2015, trade surplus narrowed to RM10.2 billion from RM12.2 billion in October.
As of yesterday, oil prices further plunged 6% to new 12-year lows as further ructions in the Chinese stock market threatened to knock crude as low as US$20 (about RM87) a barrel, reported Reuters.
With Malaysia being Asia’s only net oil exporter, the ringgit is under pressure from a slump in the Brent crude prices. It fell to RM4.407 against US dollar after the Moody’s downgrade yesterday as of 2.26 pm in Kuala Lumpur, according to prices from local banks compiled by Bloomberg.
Government finances, several analysts observed, is currently under pressure as it struggles to meet its 2016 fiscal deficit target of 3.1% of GDP – down from 3.2% last year – which is dependent upon GDP growth at and above 4.5% and oil prices averaging US$48 per barrel.
Prime Minister Najib Abdul Razak will be chairing a fiscal policy committee meeting this month to revise Budget 2016, which he was earlier quoted as saying that much has changed since it was tabled in October last year. Analysts tracked by KINIBIZ believe that a trim in operating expenditure, cut in grants, transfers to statutory bodies and allocation to subsidy programmes are imminent.
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