KUALA LUMPUR: The ringgit’s “rocky journey” is expected to persist into the rest of 2015 as negative news flow, credit reratings and concerns over the country’s financial health amid the continued weakening of the global oil price conspire to drive volatility in the currency’s value.
Yesterday, the ringgit appears to have been hit by news that rating agency Fitch Ratings Inc had said the country’s credit rating could be downgraded to the BBB range from the current A- rating if the trade balance worsens and in view of state investment company 1Malaysia Development Bhd’s (1MDB) struggles to meets its debt obligations.
Bloomberg reported that Fitch, which currently has a “negative” outlook on the country’s sovereign ratings, said in an interview that Malaysia would “sit more naturally” in the BBB range, two levels below its current A- rank. It also said Malaysia’s rating is “more than 50% likely” to be downgraded.
The ringgit was lower by 0.3% at 3.7075 against the US dollar yesterday. This represents the currency’s lowest level year-to-date and a 6.01% decline against the greenback from the start of the year.
However, experts downplayed the losses in the ringgit against the US dollar yesterday, saying that a potential downgrade would already have been priced in by the market.
Etiqa Insurance & Takaful Bhd head of research, Chris Eng, told The Edge Financial Daily that a downward rerating by Fitch is something that the market is “prepared for” and any negative impact of such a move on the ringgit will be “minimal”.
“How much lower can the ringgit go? That question is very difficult to answer.
“There will be some volatile swings in the ringgit from now to the end of the year but our position is that the ringgit will end stronger than the current levels. In the meantime, it will be a rocky journey,” said Eng.
He pointed out that some comfort can be found in the decisions of other rating agencies to maintain their comparatively positive ratings on Malaysia.
Moody’s Investors Service has affirmed Malaysia’s A3 rating with a positive outlook while Standard & Poor’s Rating Services has kept its A- long-term rating with a stable outlook on the country.
RHB Research Institute Singapore Pte Ltd’s rates and foreign exchange strategist Melody Lim said, “We opine that some of the negative rating impact [on the ringgit] has been priced in. This is evident in some of the earlier portfolio rebalancing in fixed income portfolios which were also repositioned for government investment issues’ inclusion in global indices.”
In fact, she echoed Bank Negara Malaysia Governor Tan Sri Dr Zeti Akthar Aziz’s view that the ringgit is undervalued given a 9.8% decline in its value since the real effective exchange rate assessment in December 2014.
Lim, however, highlighted that a downgrade would amplify outstanding concerns over the ringgit. They include negative news flow surrounding the controversial 1MDB and declining ratio of reserves to short-term debt.
M&A Securities Sdn Bhd head of research, Rosnani Rasul, stressed the ringgit is “misaligned to the country’s fundamentals” by about 10%.
“Ratings can go up and they can come back down. What is most important is the fundamentals of the country on the long-term basis and not a snapshot of what it is.”
“Fundamentally, Malaysia is still strong with respectable employment rates, strong exports, a current account surplus and subsidy rationalisation plans to boost revenue,” said Rosnani.
This article first appeared in The Edge Financial Daily, on March 19, 2015.