KUALA LUMPUR (July 15): The current rate of the ringgit is not reflective of Malaysia’s strong underlying economic fundamentals and the currency, which has continued to slide despite the recent sovereign outlook revision by Fitch Ratings, has overshot on the downside, said Franklin Templeton Investments.

This, said its executive director and head of Malaysia fixed income and sukuk Hanifah Hashim in a blogpost today, is due to negative sentiment arising from domestic and external headwinds.

Among these are the domestic politics that stemmed from the debt incurred by government strategic investment firm 1Malaysia Development Bhd (1MDB) and its potential risk to the economy, which have affected investors confidence, it said.

The volatility in China’s market, uncertainty in the eurozone, oil price weakness and the threat of an interest rate hike in the US, also exacerbated the already negative sentiment, it added.

At 5pm yesterday, the ringgit was quoted at 3.8050/8080 against the greenback, still below the 3.8000 psychological threshold and the rate at which the country pegged it at the height of the Asian Financial Crisis in September 1998.

“Based on our analysis, we believe Malaysia still remains stable although we recognise the country will be affected by issues emanating from the political front locally as well as weaknesses from the external front ...” said Hanifah.

She is of the view the external environment will likely remain challenging over the near to medium term — weighed down by volatility in China’s market — but she expects Malaysia to remain resilient over the longer-term.

“However, we expect Malaysia to remain resilient in macroeconomic terms — moderating but remaining positive in terms of [gross domestic product (GDP)] growth, with low inflation and a sustained positive current account balance despite a challenging environment,” she said, adding that while her firm sees potential for setbacks in GDP growth over the next year or two, it believes growth could pick up again by mid-2016.

“Malaysia’s economic picture appears healthier over the longer term as the impact of oil prices and the country’s fiscal deficit position could begin to narrow as planned,” she added.

On the fiscal front, Hanifah said Franklin Templeton’s projections for non-performing loans are relatively stable over the medium term, with M2 monetary supply continuing to expand.

“Investors’ concern surrounding the impact of alleged impropriety tied to 1MDB in the financial sector appears to be overdone, as stated by the Central Bank of Malaysia’s governor Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz, who early this year stated that no individual entity will have a systemic implication to the overall financial system of the local economy," said Hanifah.

Additionally, Malaysia’s fiscal deficit trend has been narrowing, from 7% of GDP in 2009 to 3.5% in 2014, she added.

Furthermore, she noted that maintaining the initial fiscal deficit target of 3% of GDP in 2015 was a challenge, given the fall in oil prices, which declined more than 40% in the last year.

Hanifah said the prudent economic policy reforms contained in the Economic Transformation Programme (ETP), designed by the government to turn Malaysia into a high-income economy by 2020, has however helped buffer the impact of oil price weakness.

These reforms included the removal of the fuel subsidy, the implementation of Malaysia’s goods and services tax (GST) and other spending cuts, she noted.

The government has since revised the fiscal deficit projection to a manageable target of 3.2% of GDP for 2015, she said, and that "we believe the deficit trend will still be manageable — the fiscal deficit target of zero may be achieved by the year 2020".