Recent fall in Ringgit could set tone for more weakness

Singapore - THE gathering speed in the weakening of the Chinese yuan, stubbornly low oil prices and stronger greenback amid rising tension in the Middle East has hit Asian currencies badly, although none so hard as the Malaysian ringgit.

The ringgit led the slide in Asia this week on fears that a slowing China will hurt commodity-reliant Malaysia, given the size of its trade and investment exposure - including large bulk buying of its palm oil - with the world's second largest economy.

The Malaysian currency fell over one per cent to 4.3925 against the dollar as at 6.20 pm on Wednesday after reaching 4.3975 earlier, the lowest level since Nov 8, according to Bloomberg.

It fell 0.6 per cent against the Singapore dollar to 3.0645, over one per cent against the British pound to 6.4371 and the euro by 0.7 per cent to 4.7172.

It could get worse before it gets better. In what appears to be one of the most pessimistic projections thus far, Kuala Lumpur-based independent currency strategist Suresh Ramanathan expects the ringgit to inch towards five to a dollar in the first quarter of this year. Much of that, he says, is because Malaysia is still very much a commodity-based economy - this is particularly hurtful in a commodity slump - and that the US dollar is expected to rise ahead of the November polls as has been the case every election year.

"This implies that the ringgit has more downside compared with the rest of the currencies," he said.

He expects the ringgit to oscillate between 4.80 and 5.20 to the dollar in the second quarter before marginally moving towards 4.50-4.80 in the third quarter to cap the final quarter at 4.50.

Malaysia, he claimed, is facing a ringgit crunch that is not being adequately tackled by policymakers and is reflected by the recent spikes in ringgit deposit rates by banks in Malaysia.

Moreover, fixed deposit rates of 4.25-4.5 per cent against the policy rate of 3.25 per cent points to a "major mismatch" in funding costs of trades and the "reality of deposit shortage", he added.

Cognisant of the macro challenges, Malaysia set up a special economic committee last August - one of many such committees that have been set up over the years under the leadership of Prime Minister Najib Razak - to navigate the unsettling headwinds but to date, nothing has yet to come out of it.

If Mr Ramanathan's predictions play out, the ringgit is likely to hold court as the region's worst performing currency this year, echoing its 2015 showing, no thanks to depressed commodity prices, rising US interest rates and the scandal involving state-backed 1Malaysia Development Berhad which triggered a now-dissipating political crisis.

But not all analysts are of like mind or anywhere as pessimistic.

While acknowledging the external headwinds weighing on the currency, Singapore-based Maybank head of foreign exchange research Saktiandi Supaat expects the ringgit to strengthen slightly towards 3.95 in the first quarter of 2016 and stabilise around 4.15 in 2016.

Much of that may be tied to the "overdone" oil supply amid weak global demand and a more moderate rise in the US dollar this year, he said.

For DBS senior currency economist Philip Wee, the return of currency stability for much of Asia in the latter part of the year will hinge on the global economic recovery turning "more balanced and synchronised". For now, analysts say that the outlook rests squarely on data and event flows which could fan further market volatility and macro uncertainty.

anitag@sph.com.sg

This article was first published on January 7, 2016.
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