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Last year, the Malaysian Ringgit was one of Asia’s worst performing currencies mainly due to Malaysia’s 1MDB scandal and the drop in oil prices.
The latest rout, triggered by Trump’s win at the US presidential election, has seen the currency fall nearly 7 per cent since Nov 9.
Given that there was an ongoing series of negative events that has troubled the Malaysian Ringgit since last year, is it possible for the currency to rebound as soon as next year? To me, this is highly unlikely. Let’s explore some of the reasons why I am still pessimistic about the currency.
Reason 1: Political Instability
Investigations were continuing globally into allegations that billions of dollars were looted from Malaysian state development fund 1Malaysia Development Berhad (1MDB). The long-running scandal has involved allegations that funds flowed to Prime Minister Najib Razak’s personal bank account and to his stepson. This simmering political crisis will remain and is unlikely to restore investor confidence in the near future. A change of leadership is also unlikely in the near term as the opposition is disorganised.
Reason 2: High foreign ownership of Malaysia’s government bond market
As long as a large part of government bond market is owned by offshore investors, it will leave the country extremely vulnerable to capital outflows should bad news emerge about the nation again. Hence, the current bond market’s structure is not favourable to Malaysia’s currency in the near term. According to a Reuters report, foreigners owned more than 40 per cent of Malaysia’s government debt, the highest percentage in Asia.
Reason 3: Government Intervention
Recently, Bank Negara Malaysia (BNM) requested foreign banks to commit to stop the trading of ringgit in the offshore non-deliverable forwards (NDF) market. Prior to that, it also confirmed that it had intervened in the currency markets to defend the ringgit. These have spurred concerns about the regulator’s handling of the markets and raised the spectre of capital controls that were last seen during the Asian financial crisis nearly two decades ago. As a result, this would further undermine investor’s confidence to invest in Malaysia as this would make it difficult or impossible for investors to remove cash from the country, making it less desirable as an investment destination.
On top of that, the Malaysian currency continues to be pressured by a toxic combination of long-standing threats – fluctuations in the price of crude oil, depleting foreign exchange reserves and slowing economic growth.
The jump in oil prices following the OPEC’s sudden decision for a joint output cut did not do much to help the currency either.
On a side note, instead of resorting to more extreme forms of capital controls such as a fixed currency regime to save the falling Ringgit, like during the depths of the Asian Financial Crisis where former Premier Mahathir Mohamad imposed capital controls and pegged the currency at 3.8 against the US dollar, I feel that the most prudent option is to let the ringgit continue to move according to market forces and to address the root cause of the problem. A fixed currency regime would only make the situation worse.
In conclusion, given that the weak fundamentals are likely to persist, my view seems to be that the currency will continue to under-perform its regional peers.
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