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M'sian ringgit at a 3-year low as foreign investors cut stakes
Publication Date : 16-08-2013
High debt levels and a persistent fiscal deficit have clouded Malaysia’s economic outlook, with the ringgit at its weakest against the US dollar since mid-2010 as foreign investors reduced their stakes in local equities and bonds.
Since the Fitch Ratings’ downgrade of Malaysia’s sovereign credit outlook to “negative” from “stable” on July 30, sentiment has weighed on the FBM KLCI and the ringgit, which dropped to a three-year low to 3.28 ringgit yesterday, as foreigners sold off Malaysian bonds and stocks.
The downgrade was mostly due to Malaysia’s growing federal government debt, which rose to 53.3 per cent of gross domestic product (GDP) at end-2012, up from 51.6 per cent at end-2011 and 39.8 per cent at end-2008. with the budget deficit according to Fitch widening to 4.7 per cent of GDP in 2012 from 3.8 per cent in 2011.
As a knee-jerk reaction to Fitch’s downgrade, the market fell 23 points to 1,772.62 on July 31. It also triggered a 0.6 per cent intra-day depreciation in the ringgit to 3.24 ringgit for US$1 on July 31.
Government bond yields also spiked 10 basis points to 3.49 per cent for three-year papers and 7 basis points to 4.13 per cent for 10-year papers in a single day.
This week, the FBM KLCI certainly appears to have recovered, as volumes returned and small cap stocks started to come back to life. It closed 1.52 points down yesterday to 1792.21 points with 2.42 billion shares transacted, which is almost at pre-Fitch rating levels.
The yields of the three- and 10-year government papers have dropped to 3.36 per cent and 3.84 per cent respectively, with outflow of funds having stopped.
A head of fixed income said that Moody’s reaffirmation of Malaysia “stable” outlook helped, and showed that things weren’t as bad.
“The ringgit’s weakness is largely due to foreign outflows from both the bond and equity market in tandem with regional markets following a stronger US dollar as the
US Federal Reserve signalled the tapering of the US bond purchasing programme. There has also been positive economic recovery in the United States,” said Allianz Malaysia Bhd chief investment officer Esther Ong Chen Woon.
She added that the ringgit began its decline when the US Federal Reserve at end-May started to signal tapering of the US bond-purchasing programme and guided the end of bond-purchase programme by mid-2014. Since then, the ringgit had dropped 6 per cent until before the Fitch downgrade.
“I think the current ringgit weakness at the 3.20-to-3.27 range seems to be overdone. It should normalise to the 3.15-to-3.20 level,” she said.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng isn’t as pessimistic as most people, and feels that a much brighter second half awaits, and that it is a matter of time before the ringgit inches back to the 3 ringgit mark.
“We’ve had some positive developments recently. First of all, the eurozone grew by 0.3 per cent in the second quarter of 2013, after six quarters of negative growth.
Secondly, the US economy is holding up well despite the sequestration measures. Thirdly, the slowdown in China has bottomed, and now there is expectation of faster growth in the second half,” said Yeah.
On the back of this, Yeah is anticipating a much better second-half outlook for export-driven Malaysia, further supported by its strong domestic demand.
In fact, he thinks that the second-quarter GDP results for Malaysia will be a precursor to the improvements for the second half.
“The Fitch rating’s effect is just temporary. With the improvement in our exports along with some fiscal reforms during the next budget, the economy should be in a much stronger footing over the next 18 to 24 months,” said Yeah.
Moody’s has an A3 government bond rating for Malaysia.
It said that the high degree of government financial strength was underpinned by the country’s strong external position and high savings rates as compared with its peers. In particular, Malaysia’s large stock of foreign exchange reserves provides a buffer against exogenous shocks that could otherwise undermine government finances.
Malaysia’s fiscal framework has grown more dependent on commodity revenues in the absence of broad tax reform. These developments have raised structural pressures.
The real GDP grew 4.1 per cent year-on-year in the first quarter, compared with the 5.6 per cent pace recorded for the full year in 2012.
On a seasonally-adjusted basis, Moody’s said Malaysia recorded a trade surplus of US$3.4 billion, the smallest surplus since 2002 and representing the sixth decline in the past seven quarters.