By Stephanie Jacob
The Fed’s decision in mid-December, persistent low oil prices and domestic uncertainties mean that the ringgit is likely to remain undervalued in 2016, trading above the RM4 mark.
________________________________________________________________________
To some extent Malaysia’s weak currency and the poor sentiment surrounding the economy in general are not unique to the country. In fact all emerging nations and large commodity-producing nations have been impacted by similar negative sentiment.
Much of this is driven by uncertainty over when the US Federal Reserve (the Fed) would pull the trigger and raise its interest rates, something that had not happened in a decade. A hike in interest rates in the US will have consequences for countries all over the world, but in particular for emerging markets.
Emerging markets in particular benefitted from the Fed’s quantitative easing policy which flooded the market with so-called “hot money”. Much of this flowed to emerging markets because of their more attractive yields. But a rise in interest rates would likely result in an increase in yields in the US, which would reduce the attractiveness of emerging markets. Concerns over the timing, pace and quantum of the outflows have been driving the weakness of the ringgit.
Therefore, every time the Fed met it had led to a debate over whether that meeting would bring the rate hike or not. The Fed finally announced a hike in interest rates in their Dec 15-16 meeting.
KINIBIZ spoke to economists and analysts about the impact a December rate hike would have. We also asked what other issues which might hurt the ringgit’s recovery and whether it will remain undervalued in 2016.
What happens after the Fed raised rates in December?
There will be continued negative impact for the ringgit going into 2016.
After the Fed has raise rates, there will be an immediate impact on the ringgit which will cause it to weaken, perhaps even to the RM5 per US dollar mark before moderating towards the mid to latter half of 2016, suggested some analysts.
Independent analysts Suresh Ramanathan opined that a Fed rate hike could result in the ringgit hitting RM5 to the US dollar because of what he believes is a lack of market-related measures being executed by Bank Negara Malaysia (BNM) and the Finance Ministry to stem the lack of liquidity in the ringgit foreign exchange interbank market.
“The ringgit will likely edge towards RM5 to the US dollar in the next one to three months, before stabilising in the region of RM4.50 to RM5 in the first half of 2016 (1H16). In 2H16, the ringgit will remain trading between RM4 to RM4.50,” he said.
Rajiv Biswas
IHS Global Insight’s Asia-Pacific chief economist Rajiv Biswas said: “The ringgit is expected to edge down slightly against the US dollar in December… with the ringgit forecast to average around RM4.46 against the US dollar in December 2015, remaining at around these levels until mid-2016 before appreciating to around RM4.40 by end-2016.”
Meanwhile, independent analyst Lim Heng Guie said the quantum of the first rate hike and how many subsequent hikes to follow next year will also factor into how the ringgit performs in 2016.
“What will matter is whether the hikes are within expectation or if the Fed will be more aggressive, should the economic data for example be better than expected. If it is more aggressive this might cause more capital flow volatility,” explained Lim.
Commodities prices will also play a part
The other factor pressuring the ringgit is the low oil prices. Although Malaysia has significantly reduced its dependence on oil-related revenue, the market has so far not seemed to have factored that in, and concern over the impact of the low prices on government revenue has also hit the ringgit hard.
Lim added that oil prices stabilising will also help to shore up the ringgit. “What we need is certainty over monetary policy and stability over the oil prices and commodities,” he said. “Although we are not as dependent on oil anymore – it made up less than 20% of the government’s revenue – we are still a small nett exporter so the low prices are having an impact. More so than on other countries.”
Suresh Ramanathan agreed, saying that the ringgit would be adversely affected should the oil prices fall further below US$40 per barrel and if other commodity prices were to remain soft in 2016.
Domestic concerns include political uncertainty, inflation
While external measures have had a significant impact on the ringgit, sentiment over the currency has not been helped by political uncertainty. BNM governor Zeti Akhtar Aziz in November said that the ringgit would trend closer to its fundamentals “when there is a conclusion to domestic uncertainties”.
Analysts also highlight inflation as a factor which could either help or hurt the ringgit in 2016.
CIMB Group’s head of fixed income research Ahmad Mukharriz opined: “A big reason the ringgit is particularly pressured is that inflationary direction remains on the way up in 2015-2016, as opposed to other emerging market countries (save Indonesia) which has negligible inflation if any, and this has to be compensated in terms of purchasing power parity levels via a weaker ringgit if compared with other emerging market currencies.”
Standard Chartered Bank’s head of fixed income, commodities and currencies strategy, group wealth management Manpreet Gill said: “A significant fall in inflation, which remains elevated currently, could also be positive. Easing in inflation may give BNM reason to cut interest rates, which could be supportive for growth.”
Momentum of Malaysian economy important
With the ringgit to continue to be pressured, it will be important for the Malaysian economy to remain fundamentally strong so it provides some measures of support for the currency and also so it would be able to drive investor confidence.
CIMB’s Ahmad said: “We have to watch some of our fundamental indicators to gauge how firm the direction of the ringgit can be in 2016 – these include growth and inflation, and the balances in the current account, government budgets and foreign exchange reserves. Appropriate policy responses from the government is (also) the guiding factor.”
Biswas said: “If the Malaysian economy remains resilient, this will tend to support the ringgit, whereas if the economy slows down this could generate negative sentiment towards the ringgit.”
Yesterday: What ails the ringgit?
You must be logged in to post a comment.