KUALA LUMPUR (Oct 24): Measures announced in Budget 2016 yesterday may have limited impact on the ringgit, Standard Chartered Research said, as the announcement comes against a backdrop of increased expectations of further European Central Bank (ECB) easing which has been positive for Asia ex Japan (AXJ) currencies.
"We maintain our view that the ringgit underperformance versus other AXJ currencies is likely over and USD-MYR is likely to consolidate in the short term," it said in a report released today.
"We believe the following drivers will continue to support the ringgit in the coming weeks. Firstly, the the ringgit is significantly undervalued. The ringgit real effective exchange rate (REER) is 13% below both the past five-year and past 10-year averages," said Standard Chartered Research.
"Secondly, market positioning is short the ringgit and exposed to further bouts of potential short covering.
"Thirdly, likely quantitative easing expansion by the ECB and the Bank of Japan (BoJ) will be supportive for risk appetite and the ringgit. The key swing factor for USD-MYR is likely to be US Federal Reserve rate-hike expectations," it added.
The research firm is forecasting the ringgit to trade at 4.25 against the US dollar by end-2015.
Standard Chartered Research is also of the view that the Budget 2016 announcement is neutral for the rates market in the medium term as the gross supply outlook is smilar to that in 2015, although net issuance of Malaysian government securities (MGS) has risen significantly.
"Based on the 2016 fiscal deficit target of 3.1% of gross domestic product, we estimate gross marketing borrowing at RM86.9 billion, which includes new funding needs of RM38.3 billion and RM48.6 billion of redemption in MGS and government investment issues (GII).
"Net MGS supply in 2016 is likely to increase significantly to RM21.1 billion from RM9.2 billion this year due to large maturities," it said.
Given the lower MGS redemptions in 2016, Standard Chartered Research believes that the government may split gross issuance between MGS bonds and GII in a 55:45 ratio (versus 57:43 in 2015). This implies gross MGS issuance of RM47.7 billion, and gross GII issuance of RM39.2 billion.
It also expects foreign inflows to pick up in 2016 on attractive valuation, a better foreign exchange (FX) outlook and improving risk sentiment towards emerging markets, especially as the latest ECB meeting on Oct 22 signalled further easing in December.
"We maintain our neutral duration outlook on ringgit-denominated bonds as we expect Bank Negara Malaysia to maintain a neutral policy stance in the medium term. Supply risk is not a major concern in Malaysian rates.
"The pullback of foreign inflows since July is mainly impacted by political uncertainty and global emerging markets growth concerns via the FX channel. We think current foreign holdings of MGS will be more resilient than the market expects. However, our client conversations indicates that benchmark index investors are likely to remain underweight because the ringgit remains vulnerable during periods of market stress," it added.
Standard Chartered Research also said while the fiscal consolidation targeted in the 2016 budget will likely allay investor concern about the impact of lower oil prices on Malaysia’s finances, negative investor sentiment is unlikely to shift meaningfully until the political noise surrounding 1Malaysia Development Bhd (1MDB) subsides.
It is therefore remaining "underweight" on Malaysian sovereign complex.
"(The) political noise surrounding 1MDB remains high. We believe its spreads are unlikely to tighten significantly ahead of the potential sale of its (subsidiary) Edra Global Energy Bhd's energy assets; the result of the sale will likely be known by end-November," said Standard Chartered Research.