By G. Sharmila
The ringgit hit a 10-year low yesterday morning, at 3.7843 against the US dollar. Its weakness has been attributed to factors such as Malaysia’s falling forex reserves, falling oil prices and a possible sovereign rating downgrade by Fitch. But are they the real reasons? Are investors’ concerns overdone? KINIBIZ investigates.
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The ringgit appears to be growing ever weaker, hitting a 10-year low yesterday morning, which is further fueling speculation that it may hit the 3.8 level against the US dollar. Various analysts have stated their opinion on the subject, saying the weakness has to do with the US Federal Reserve’s rate hike timing, short-term outflows linked to Malaysia’s falling forex reserves, falling oil prices and a possible sovereign rating downgrade by international ratings agency Fitch Ratings.
“Currency volatility or unpredictability rather than the level is the bane of investors. Of course, foreign investors already in the country will fret if the ringgit continues to lose value as their earnings when repatriated would be lower in their home currency.
Yeah Kim Leng
“On the other hand, new foreign investors will find it cheaper to acquire Malaysian assets. In aggregate, these two groups of investors will be side-lined if the ringgit instability heightens, leading to lower investment, trade and financing activities in the country,” opines Dr Yeah Kim Leng, dean of the business school at Malaysia University of Science and Technology.
The ringgit’s depreciation can be attributed to a combination of factors, says Wong Chee Seng, strategist, FX and rates, markets at AmBank Group. “Externally, the ringgit is falling due to the positive economy data from US and timing over the hiking of interest rates. Domestically, increasing political noise over sensational developments in 1MDB, risk of fiscal slippage and the threat of possible sovereign rating downgrade by Fitch Ratings has caused the sell-off of the ringgit as well,” he told KINIBIZ via e-mail.
On whether the ringgit will hit the 3.8 level, Wong would only say that the bank takes a view that
RM3.80 against USD is a key psychological level. “The current misalignment of the ringgit against regional peers by a wide margin will limit the downside of the ringgit,” he said.
Yeah, however, believes that the ringgit is undervalued. “If we look at the ringgit’s nominal and real trade-weighted exchange rates, they had slid year-on-year by 2.5% and 1.4% in May based on the statistics compiled by the Bank of International Settlements (BIS). For the same month, the ringgit was hovering around RM3.60 against the dollar or about 11.7% down against the dollar,” he explained.
He added that from an international competitiveness perspective, the ringgit is therefore not as badly battered or undervalued when compared with its trading partners. “It is still negative which means it is undervalued against its trading partners and more undervalued versus the US dollar ceteris paribus (with other conditions remaining the same). A good gauge of the equilibrium currency value is the current account balance whereby a positive signals undervaluation and vice versa. On this count, the ringgit currently appears to be slightly undervalued,” Yeah told KINIBIZ.
If the reasons are true and that sentiment plays a big role, what will turn the tide for the ringgit? Says Yeah: “Currency markets like all financial assets markets are prone to overshooting. Sentiment and confidence play an important part in driving short term currency fluctuations. With the slew of negative news particularly the ongoing 1MDB saga and the government’s rising contingent liabilities, it is not surprising that these are captured in the currency movements or so-called ‘fully priced’. So whatever weaknesses will reverse quickly once the news turn positive.”
Commenting on the outlook for the ringgit, Yeah says that its short-term outlook is driven by the outperformance of the dollar against all currencies due to its better economic performance and the first interest rate increase expected towards the end of this year.
“Currency traders and investors are also keeping a close eye on the monthly export and trade balance numbers for signs of the ringgit value being over-corrected. On balance, a RM3.65-3.75 appears to be the short term level. On the longer-term, the ringgit is expected to firm up perhaps gradually by 2-3% annually in line with the higher growth and interest rate differential,” he adds.
Wong Chee Seng
AmBank’s Wong was less optimistic. “Oil prices are anticipated to stay stable with a downward bias for the rest of the year in response to build-up in supply that will have impact to the local currency. Under the assumption of secular strengthening of the US dollar and a series of local uncertainties, we are projecting the US dollar-ringgit to weaken further at least until 1H 2016,” he said.
A research report by MIDF Research on Monday concurred with Wong’s view on the relationship between the ringgit and crude oil prices. It noted that while the ringgit had closely tracked the price of crude oil before, “the correlation has plummeted and the gap widened last week.”
“It is our conviction that the local equity market will not make much progress until the ringgit has stabilised, and order is unlikely to be restored until the ringgit is better behaved against the price of crude oil. Meanwhile, the widening ringgit-oi disjunct last week is ominous for equity prices in general,” the research house opined.
Although it is clear that investors have their reasons for selling down the ringgit, those reasons appear to be sentiment, rather than numbers-driven. As Yeah has said, the country’s current account balance is positive, which points to the ringgit being undervalued.
However, the reality is also that the sentiment is being driven by real concerns over the external economic environment, including that of the timing of the Fed’s rate hike, global oil prices and domestic concerns such as fiscal slippage and the 1MDB saga.
It’s anyone’s guess really, on when and how the ringgit will stabilise, but for now, it appears that the weakness will persist in the short-term.
Yesterday: Why the ringgit is weak against the Singapore dollar
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