(Oct 17): Strategists are cutting their forecasts for Malaysia’s ringgit at the fastest pace in more than a year on concern the nation is vulnerable to a selloff as the Federal Reserve prepares to raise interest rates.

Projections for the year-end have been lowered by 2.4 percent this month, the most in Southeast Asia ahead of Indonesia’s rupiah, the median estimate in a Bloomberg survey shows. That followed the ringgit’s 3.9 percent drop in September. PineBridge Investments sees Malaysia’s second-highest debt burden in Asia as a risk, while HSBC Holdings Plc points to foreign holdings of the nation’s debt, which are up five-fold since 2008.

Malaysia’s government bonds have delivered the smallest returns in the region this month amid concern Prime Minister Najib Razak’s commitments to fix the nation’s finances won’t bear fruit soon enough to reassure emerging-market investors. HSBC, the most accurate forecaster for the ringgit last quarter, reduced its year-end estimate by 1.5 percent.

“The ringgit will remain more sensitive to external developments,” Dominic Bunning, senior currency strategist in Hong Kong at HSBC, said in an Oct. 13 e-mail. “While the ongoing fiscal consolidation outlined in the budget is an example of the improvement in the domestic story, it may be challenging for the ringgit to move onto a much stronger footing purely on this perspective.”

Fragile Five

HSBC cut its year-end ringgit target to 3.28 per dollar from 3.23, putting it in line with the median of 27 estimates in Bloomberg’s survey. Oversea-Chinese Banking Corp., the second- most accurate forecaster in the third quarter, predicts the currency will drop to 3.31 by Dec. 31 from 3.2850 as of 11:02 a.m. in Kuala Lumpur today.

All but one of the 24 emerging-market currencies tracked by Bloomberg have weakened against the dollar in the past three months as the Fed gears up to tighten policy next year for the first time since 2006. Strategists cut their projections for Indonesia’s rupiah by 1.7 percent this month.

The currency of Malaysia’s southern neighbor is among the “fragile five,” a term coined by Morgan Stanley for exchange rates that are most vulnerable because of their dependence on overseas inflows to fund current-account deficits. The other four are the Brazilian real, South Africa’s rand, Turkey’s Lira and the Indian rupee. They all fell by at least 2 percent in September, with the real leading losses at 8.6 percent.

Debt Ownership

While Malaysia isn’t among the fragile five, the nation’s proportion of debt to gross domestic product of 54.6 percent is the highest among 13 Asian developing markets tracked by Bloomberg after Sri Lanka and on a par with Pakistan. Overseas investors own 31 percent of Malaysia’s government bonds, compared with 18 percent for Thailand, central bank data show.

Overseas holdings of Malaysian debt, including all government and corporate securities, dropped to 256.9 billion ringgit ($78.2 billion) in August from a record 257.2 billion ringgit in July, data from the central bank shows. That compares with 46.9 billion ringgit in 2008 when the Fed started to lower borrowing costs amid the global financial crisis.

Southeast Asia’s third-biggest economy has run a fiscal deficit since 1998. Last week’s budget reiterated the aim to narrow the gap to 3.5 percent of GDP this year from 3.9 percent in 2013 and balance it by 2020. Malaysian authorities are “confident in terms of achieving our targets,” economic planning Minister Abdul Wahid Omar said in an Oct. 14 interview in Hong Kong.

“We are focusing on our fundamentals,” Abdul Wahid said. “It’s all nicely going down towards balanced budget in 2020. We are clear about how we get there.”

Fiscal Measures

As a means to improve the nation’s fiscal position, a new 6 percent goods and services tax is due to be implemented in April, which has raised concern inflation will accelerate in 2015 from this year’s average of 3.3 percent.

“If concerns arose over inflows to emerging-market debt as a whole, Malaysia could be vulnerable due to its precarious government debt level,” Anders Faergemann, who helps oversee $4.3 billion as senior fund manager at London-based PineBridge, said in an Oct. 15 e-mail. “There are valid concerns about the sustainability of Malaysia’s government revenue and expenditure, but as long as the financial system has sufficient liquidity we would not be too concerned.”

Malaysia’s local-currency sovereign bonds returned 0.4 percent in October, compared with 1.9 percent in Thailand, 1.7 percent in Singapore, 1.6 percent in Indonesia and 1.4 percent in the Philippines, according to Bloomberg and Bank of America Merrill Lynch indexes.

‘Dollar Dynamic’

Prime Minister Najib lifted fuel prices by 10 percent on Oct. 2, the second increase in a year. The economy is forecast to expand as much as 6 percent in 2015.

“If the fiscal consolidation remains on track, we would be looking at incremental improvements in the fiscal position,” Emmanuel Ng, an economist in Singapore at Oversea-Chinese Banking, said in an Oct. 8 e-mail. “This would augment the ringgit’s structural resilience at the margins but may not overshadow the potential negative drag from a stronger dollar dynamic.”