Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily, on December 20, 2016.

 

KUALA LUMPUR: Amid the recent fluctuations of the local currency, Malaysia’s second finance minister Datuk Johari Abdul Ghani said there is no need to panic about the weakening ringgit, stating that the nation has in place an ecosystem that encourages investment and an open economy.

“Don’t panic, we shouldn’t panic,” Johari said.

“We must encourage more export, facilitate business activities [and] the free flow of money in and out of the country, [without] capital control or pegging [of the ringgit],” he told reporters after witnessing the strategic collaboration signing ceremony between Amanah Raya Bhd and Japan real estate management company Kenedix Inc here yesterday.

When asked on the fair value of the ringgit, Johari said, “It depends at what point you come in [as an investor]; if you come [in] at [the] 3.30-level you would want the ringgit to be at 3.30 and if you come at [the] 3.80-level you would want it to be at that level.”

The ringgit hit an intraday low of 4.4805 yesterday, before settling at 4.4785 against the greenback.

During the Asian financial crisis (AFC), the ringgit reached a record low of 4.8850 in January 1998.

Whether the ringgit could be heading back to the AFC levels, market economist Dr Suresh Ramanathan said any move beyond 4.5 for the ringgit will open that possibility.

“Bear in mind as the currency weakens beyond certain levels, the impact of dollarisation of the economy picks up momentum.

“In other words, the confidence in the currency wanes, and public at large tends to prefer to hold onto a firmer currency.

“While this is not at a large scale yet, there is growing fear of a loss of confidence in the currency,” he said in an email to The Edge Financial Daily.

Suresh added that as the local currency moves beyond 4.50 against the greenback, liquidity in the interbank market for the US dollar dries up significantly.

“When this occurs, the bid and offer price levels for USD/ringgit tend to widen, causing concern for decisions to hold [the] ringgit in the overnight trading sessions, due to the risk that the ringgit will weaken further in the next few trading sessions.

“This pattern is currently occurring in the post-Trump trading sessions in the Kuala Lumpur interbank market,” he said.

ForexTime Ltd vice-president of corporate development and market research Jameel Ahmad opined it is possible for the ringgit to extend towards 4.60 against the greenback if the dollar buying spree continues.

“What spectators must understand is that the reasons for the losses in 2016 against the crisis lows in 1998 are completely different.

“The historic lows were fuelled by a crisis in the Asian region. What we are currently encountering is a truly unique story where investors on a global scale are purchasing the [US] dollar and the major reserve currency has reached levels not seen since the beginning of the millennium.

“Literally every currency is getting hit against the dollar, and it is not limited to the ringgit or other emerging-market assets.

“The euro crumbled to its lowest level since 2003 late last week and the yen has dropped over 14% since the night of the US election, which is simply quite remarkable,” he said in an emailed response to The Edge Financial Daily.

Though many have linked the weakening ringgit to factors such as high foreign holdings of Malaysian debt notes, “the Trump card” and anticipation of more rate hikes by the US Federal Reserve, Suresh said there are salient factors at play.

“These include the current export proceeds that are being converted from USD to ringgit that are being matched back to back from the interbank market to Bank Negara Malaysia (BNM).

“This means interbank has very little leeway to hold the USD overnight, but has to provide the US dollars back to BNM immediately, while importers that need to buy US dollars in the interbank market are forced to use market quoted rates that are based on supply and demand of USD in the local interbank market.

“[This] literally suggests that exporters are converting their dollars into ringgit at levels reflecting a slightly stronger ringgit, while importers are forced to buy USD against ringgit at unattractive levels,” he said.

Suresh went on to say that this has led to a two-tier market occurring for exporters and importers, which suggests an unhealthy development for the local foreign exchange market.

To recap, exporters are required to convert 75% of their export proceeds which are held in a foreign currency to the ringgit effective Dec 5, as part of BNM’s move to develop the onshore financial market.

Suresh also pointed out that the ringgit and the Singapore dollar (SGD) are moving lock in step with the USD, while the rest of the Asian currencies such as the yuan, Thai baht and rupiah are not.

“Given that the ringgit and SGD are currently as weak as in 1998 on a trade-weighted basis, the policy to stabilise the ringgit should be focused more on the SGD/MYR cross instead of targeting the USD/MYR pair.

“The bottom line is once we stabilise the SGD/MYR only then could we see a more stable USD/MYR, our focus is currently off tangent,” he said.

Suresh went on to say that if other Asian currencies such as the rupiah and baht don’t weaken in tandem with the strengthening US dollar, then this will not bode well for the ringgit.

“The rupiah and baht are considered as overvalued and these currencies are still resisting the [US] dollar’s strength. If anything these currencies need to weaken further.

“The other cause for concern is, if these currencies don’t weaken in tandem, then there is a greater risk for markets to look towards the ringgit — when it continues to weaken beyond 4.50 — to be the main target of being an epicentre of the next Asian currency crisis,” he warned.

To mitigate this, he said the ringgit needs to be convertible on the capital account and allowed some degree of flexibility to be traded offshore; it also needs to move towards a more flexible trading regime from where it is currently.

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