Growing optimism for the ringgit to strengthen in the second half

THE ringgit’s continued decline has certainly gotten many Malaysians worried about their livelihoods and lifestyle trends.

The question now is whether the ringgit will recover after having fallen to low levels over the week not seen since the 1997/98 Asian Financial crisis.

The good news is – acccording to some policymakers and economic pundits – the setback is not a permanent condition.

There is growing optimism that the ringgit will recover in the second half of 2017, as economic uncertainties, especially in the United States, recede and capital outflows stabilise.

Deputy Finance Minister I Datuk Othman Azizhas suggested that the ringgit would rebound to its “fair value” of 4.10 against the US dollar between July and September. This notion is based on the improving prices of commodities such as crude oil and palm oil, steady domestic economic fundamentals and more clarity on the US economic policies under the Donald Trump administration.

Supporting Othman’s view is Affin-Hwang Capital Research chief economist Alan Tan.

Tan notes that while the ringgit will likely remain weak at the 4.50 level against the US dollar in the first quarter of this year, it is expected to recover in the second quarter before strengthening to the 4.10-4.20 level against the greenback in the last six months of the year.

“While the US Fed Reserve’s guidance is to raise interest rates three times – 25 basis points each time – this year, we believe, based on its track record, the Fed will unlikely raise interest rates more than three times...and importantly, the positive interest rate differential (which attracts capital flows) will still favour emerging markets such as Malaysia,” Tan says.

In addition, he says, market fears over the anti-trade rhetorics of Trump will likely recede once the president-elect takes office, as his economic advisers will unlikely favour a strong US dollar policy that could hurt the economy.

“The stabilisation of the ringgit will also be supported by Bank Negara’s new initiatives that require exporters to retain 75% of their proceeds in the domestic currency, while the expansion of the Chiang Mai Initiative (CMI) will help curb speculative activities on the foreign exchange market,” he tells StarBizWeek.

The CMI is a multilateral currency swap arrangement between all the 10 Asean member countries as well as China, Japan and South Korea.

But the extent of the ringgit’s rebound will not only depend on economic forces but it is also influenced by domestic and foreign investors’ confidence in the currency. Negative sentiment and perceptions could lead to a markdown of the ringgit. Lee Heng Guie

The worst is over?

Essentially, some analysts believe that capital outflows from Malaysian bonds and equities have likely subsided, and this will help ease the pressure on the ringgit, going forward.

In the bond market, Maybank Investment Bank says, the risk-reward proposition has now become more favourable and attractive for investors after the huge sell-off in November 2016.

As for the equity market, Hong Leong Investment Bank, argues that foreigners betting on ringgit depreciation and worsening fundamentals had already left Malaysia since 2015. Noting that foreign equity shareholding in Malaysia has fallen to a low of 22.6% last November compared with 25.2% in March 2013, the brokerage says it expects foreign equity ownership to linger at the current levels in most part of the first six months of 2017 before increasing in the second half of the year.

The ringgit has rebounded to close yesterday at 4.47 against the US dollar after breaching the psychological mark of 4.50 against the greenback on Wednesday.

The ringgit gains were attributable to the improved appetite for the local assets. This followed the slide in US dollar, as the frenzied optimism over Trump’s economic plans has eased. Investors considered the impact of China’s new initiative to support the yuan as well as the improving economic data from the world’s second largest economy and Europe against US data which were pointing to a softening job market in the United States.

Previous trends

Periods of high market volatility in recent years saw huge capital outflows, with the trend having resulted in significant weakness in the ringgit.

For instance, during the “taper tantrum” of 2013, when markets were concerned about the impact of the US Federal Reserve winding down its bond-purchase programme, Malaysia saw a cumulative outflow of RM28bil in debt market alone from June to August of that year. The impact on Malaysia then was exacerbated by Fitch Rating ascribing a “negative” outlook on the country’s rating. It saw the ringgit weakening from 3.00 to 3.30 against the US dollar.

The “perfect storm” period between August 2014 and August 2015, characterised by a combination of negative factors such as the plunge in crude oil prices, yuan volatility, extended ringgit weakness, culminated to foreign outflows from the debt market totalling RM59bil. The ringgit weakened from 3.15 to 4.46 against the US dollar.

At present, the world is looking at the “Trump tantrum”, which is characterised by a huge selldown in emerging capital markets and currencies after his unexpected victory last November which is attracting money back to US equities.

There was huge appetite for US equities, as reflected in the Dow Jones Industrial Average and the S&P 500 indices hitting alltime highs, on optimism that Trump’s policy platform could significantly boost growth in the US economy.

As a result of the “Trump tantrum”, foreign outflows from Malaysian government securities totalled RM19.9bil last November, while foreign selling of Malaysian equities amounted to RM4.2bil that month.

Foreign selling of Malaysian equities continued in December, with the amount unloaded moderating to RM1.6bil. Bond market data for December is not available at press time.

Still data-dependent

Despite the optimism that capital outflows would likely have receded, there are still concerns about the lingering uncertainties, not only in the global market, but in the domestic market, especially with speculation that the general election will be held in the second half of 2017.

“The prospects of the general election being held this year add to capital flow uncertainties, as foreign investors will likely minimise their exposure to Malaysian assets,” a dealer says.

“And if oil price plunged again, instead of going up as widely expected or if China’s economy slowed more sharply than expected, and the US Federal Reserve embarked on aggressive interest rate hikes, then our market and ringgit would be hit again,” the dealer explains.

Lee Heng Guie, executive director of Socio-Economic Research Centre, is also adopting a cautious stance.

“Faced with considerable uncertainties, the ringgit will remain under pressure throughout the year.

“Although the ringgit is fundamentally undervalued, it continues to face headwinds from the expectations of higher US interest rates and a resurgent US dollar as well as swing in capital flows,” Lee says.

“Bank Negara’s measures on the non-deliverable forward market and export proceeds retention should help the ringgit. But the extent of the ringgit’s rebound will not only depend on economic forces but it is also influenced by domestic and foreign investors’ confidence in the currency. Negative sentiment and perceptions could lead to a markdown of the ringgit,” he adds.

BMI Research, over the week, lowered its forecast for the ringgit.

It expected the currency to average 4.50 per US dollar this year and 4.40 in 2018, compared with its previous estimates of 4.00 and 3.88, respectively.

The research firm notes that the weakening of the yuan could weigh on the ringgit, and if the Fed raised interest rates faster than expected, it may lead to higher outflows from Malaysia and put the ringgit under greater pressure.