Ringgit expected to slide to 4.70 per US dollar by mid-2017

Ringgit expected to slide to 4.70 per US dollar by mid-2017
File photo of a general view of the Bank Negara Malaysia in Kuala Lumpur, Malaysia.
PHOTO: Reuters

Kuala Lumpur

THE beleaguered Malaysian ringgit breached 4.50 to the US dollar on Wednesday to presage a trek further south, likely towards 4.70, analysts say.

The breach just days into 2017 came even as the central bank sought to provide greater clarity on its recent liquidity and hedging initiatives by expanding the list of frequently asked questions.

Currency analysts remain unimpressed however by the central bank's moves as they contend its FX curbs are counter-productive and that it would be better to open the market to offshore trading.

While the ringgit slide was anticipated, it only added to the gloom especially for businesses struggling to cope with the mounting challenges. In the face of slumping consumer demand, manufacturers will find it tough to pass on imported inflation as a result of the feeble ringgit.

More pressing at the moment is the annual levy of RM650-RM1,850 (S$208-$593) imposed on each foreign worker that employers will now have to bear where in the past, they would have subtracted it from the workers' wages.

As they were not forewarned, some companies - particularly those in the midst of undertaking a project including construction - are especially up in arms that the additional costs have not been budgeted for.

Currency analysts contend that Malaysia’s recent FX curbs are counter-productive and that it would be better to open the market to offshore trading.Photo: AFP

Rising oil prices - of about US$55 (S$79) a barrel - have had little impact on the ringgit's performance, the irony of the decoupling driven home as pump prices were raised 20 sen for RON95 petrol and diesel on January 1.

At its lowest, the ringgit hit 4.88 during the Asian financial crisis of 1997-98 before it was pegged at 3.80 and capital controls imposed.

Macquarie Group managing director, head of FX and rates strategy Nizam Idris has forecast the MYR to touch 4.70-4.80 some time mid-year as he anticipates the outflow of capital could intensify, which would in turn hit the country's already thinned out foreign reserves and put further pressure on the ringgit.

"As a market practitioner, I believe speculation is driven by the market's fundamental view of a currency. The currency weakens due to these fundamental weaknesses."

He maintained as the ringgit is a non-internationalised currency and the spot MYR cannot be traded outside of the onshore trading hours, the NDF (non-deliverable forward) market provides global investors with interest in the MYR or MYR exposure from merchandise trade activities or investments in ringgit-denominated assets a means to hedge such currency risks 24 hours a day.

To spur demand for the ringgit, Bank Negara last month mandated exporters ensure 75 per cent of export proceeds be converted to the ringgit upon repatriation of the proceeds to Malaysia within six months of completing a transaction. Many prefer the flexibility to convert as raw material costs are denominated in foreign currencies and the strategy was used as a natural hedge.

The finance director of a company that distributes Indian healthcare supplements said the volatility was still too unpredictable even though the daily spot offshore and onshore rates have been minimised following BNM's curbs on the ringgit NDF market.

His strategy is to monitor the currencies daily and to buy the US dollar on dips and hope for the best. Asked if BNM's 75 FAQs provide greater clarity, he chafed: "By the time we read it and understand it, the ringgit would have hit 4.75."

This article was first published on Jan 5, 2017.
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