THE ringgit has gained a much-needed respite as Brent crude oil rebounded above US$60 a barrel and straw polls leaned towards the likelihood of a delay in US Federal Reserve’s much-discussed interest rate hike. It was also helpful that last Wednesday’s announcement of Bank Negara Malaysia’s foreign reserves of US$105.6 billion (RM391.4 billion) as at April 15, showed the possibility of the first month-on-month increase after five straight months of declines wiped out over US$23 billion in value.

But there continues to be “a lot of negative news out there that is affecting the valuation of the ringgit and also investor sentiment in general in terms of the performance of the stock market”, says Datuk Seri Nazir Razak, chairman of CIMB Group that co-hosted this year’s Invest Malaysia Kuala Lumpur with Bursa Malaysia.

“I think it is important for all Malaysian companies to go out and engage investors and share the investment fundamentals of Malaysia,” Nazir says, calling for “more aggressive” engagement to win back investor confidence. “You also cannot just spin, you’ve got to deal with the substance of the questions.”

This could be why Nazir chose to voice his disappointment over 1Malaysia Development Bhd’s (1MDB) refusal to engage investors at Invest Malaysia. “They declined to participate and I’m disappointed because they would have been an important element of Invest Malaysia given the backchatter on the topic,” he says.

Controversies surrounding debt-laden government-owned 1MDB is among investors’ top concerns about Malaysia — the reason its absence at Invest Malaysia is a bugbear — though not surprising to anyone familiar with Malaysia.

“I didn’t expect [1MDB] to participate but I would have been happy to be wrong. Instead we’re here whispering and pretending there is no elephant in the room and talking about who is lonely and who’s not,” one foreign financial executive tells The Edge on the sidelines of the Invest Malaysia conference that took place on April 23 and 24, on the back of fresh exposés by whistleblower site Sarawak Report on 1MDB and its links to 34-year-old billionaire investor Low Taek Jho.

The silence over the 1MDB “elephant-in-the-room” was confounded by fresh salvos launched online by former prime minister Tun Dr Mahathir Mohamad on his blog against Prime Minister Datuk Seri Najib Razak, questioning the latter over what he sees as some RM27 billion in unaccounted assets on 1MDB’s books.

Yet “the show must go on” at Invest Malaysia and Nazir says the conference remains a platform to highlight Malaysia’s top companies and the country’s fundamental strengths, which won over investors at a recent US$1.5 billion global Islamic debt offering that was hugely oversubscribed and priced better than expected.

Speaking to reporters on sidelines of the conference, Nazir stresses that the issue of 1MDB is “one isolated case” but is unfortunately “a bit of an eyesore” that is better “earlier solved” because people “tend to expect the worst when issues are not cleared up”.

The “damage” is already showing.

Bank Negara’s reserves are at their lowest since November 2010, despite hopes of a turnaround this month.

Closing at RM3.58 to the US dollar last Friday, the ringgit was down 8.67% the past year and is the third worst performing in Bloomberg’s basket of Asian currencies after the yen and rupiah, which have weakened 14.38% and 10.21% over the same period respectively.

More importantly, while the rupiah and ringgit have both weakened about 10% against the US dollar the past year, Bank Indonesia’s foreign reserves are 5.7% higher year on year whereas Bank Negara’s reserves have fallen by nearly a fifth.

Bank Negara’s reserves fell to US$105.1 billion as at end-March 2015 from US$131.17 billion as at end-April 2014. Indonesia’s central bank, meanwhile, added about US$6 billion in reserves over the period to US$111.55 billion as at end-March 2015, CEIC data shows.

RHB Research Institute executive chairman and chief economist Lim Chee Sing says this is because Malaysia “suffered more foreign selling in the capital markets than in Indonesia” on all fronts, be it in equities, Malaysian Government Securities and Bank Negara Malaysia bills.

It’s is no surprise, then, that Malaysia’s bellwether FBM KLCI performance the past year lagged that of benchmarks in Indonesia, Singapore, Thailand and the Philippines.

“At the same time, Malaysian asset management companies, unit trust funds and pension funds are diversifying their investments overseas. In addition, unlike Indonesia, Malaysia has been a net exporter of productive capital over the last eight consecutive years,” Lim says, referring to the net outflow of direct investment where the amount foreigners invest in Malaysia is less than the amount Corporate Malaysia is investing abroad.

While the net outflow narrowed from RM24.4 billion in 2012 to RM17.1 billion in 2014, he says these investments added to the total outflow of capital from Malaysia and is, therefore, a contributing factor to the fall in Bank Negara’s reserves.

That the central bank’s reserves have fallen from US$134.9 billion as at end-2013 to US$105.6 billion as at mid-April 2015 “represents a significant erosion of Bank Negara’s reserves”, says Rajiv Biswas, Asia-Pacific chief economist at IHS Global. This partly reflects net portfolio capital outflows on the Malaysian balance of payments of RM27.9 billion in 2014 as well as a RM76.5 billion net outflow on the financial account.

“Although Bank Negara has not been attempting to defend the ringgit against depreciation, nevertheless central banks do operate to maintain the pace of depreciation to try to prevent disorderly exchange rate movements,” Biswas says.

Indonesia’s foreign reserves, meanwhile, increased by US$12.5 billion to US$112 billion as at end-2014, helped by a balance of payments surplus of US$15.2 billion. This was due to a narrowing current account deficit and a doubling in the capital and financial account surplus to US$43.6 billion from increased net inflows of portfolio capital and foreign direct investment, he explains.

Biswas is quick to add that Bank Negara’s reserves “remain substantial and sufficient to cover over six months of imports, which is still very strong by international standards among emerging markets”.

“Malaysia’s external account remains a source of macroeconomic strength, with a long track record of large current account surpluses. Even with the lower oil price factored into the 2015 forecast, the Malaysian current account is forecast to remain in surplus of around 2% of gross domestic product, strengthening to over 3% of GDP in 2016. With oil prices forecast by IHS to gradually strengthen from 2016 onwards, Malaysia’s current account surplus is expected to improve further over the medium term,” Biswas adds.

Chua Hak Bin, head of emerging Asia economics at Bank of America Merrill Lynch disagrees, pointing out that Bank Negara’s reserves cover to import of 6.1 months is lowest in more than a decade. In addition, reserves cover to short-term external debt has fallen below one time.

“The ringgit will likely come under pressure when liquefied natural gas prices fall more significantly and worsen current account in 2H2015, on top of 1MDB risks and prospects of Fed rate hikes,” Chua says in an April 22 note.

“Foreign reserves have been falling on large capital outflows. Foreign reserves declined US$5.4 billion in March to US$105.1 billion, closing in on the US$100 billion psychological threshold. We estimate that Bank Negara ran down reserves by US$3.8 billion in March to defend the ringgit [with the rest largely due to translation losses].

“We also see growing tail-risks given the political developments and 1MDB. A ratings downgrade from Fitch is also more likely than not in May/June.”

On Fitch Ratings’ potential downgrade of Malaysia’s sovereign ratings by end-June, Nazir says, “I think Fitch just needs to be engaged and hopefully, they will not downgrade Malaysia because as I said, if their concern is what they hear about 1MDB or whatever, it is not systemic. People just need to go into the numbers and see what is the real magnitude of concerns”.

RHB’s Lim agrees that “it is not all gloom and doom” for Malaysia, but “neither is it just a perception issue”.

“To begin with, Malaysia’s equity market valuations were relatively rich without earnings growth to bring down valuations to a more attractive level. Subsequently, we became the only casualty in the region from the rapid drop in oil and gas prices as Malaysia is the only net oil and gas exporter in the region. Added to these were the 1MDB issue, the risk of an impending sovereign rating downgrade by Fitch… Given the high foreign holdings of financial assets in the country, Malaysia bore the brunt of foreign selling and hence, a sharper-than-expected weakening of the ringgit,” he says.

Still, there are always two sides to a coin and Malaysia will be the region’s only net beneficiary if oil and gas prices stage a convincing rebound.

Incidentally, the ringgit’s close of RM3.58 to the US dollar last Friday is its strongest in 10 weeks as Brent prices went up to US$65.58 a barrel — the highest since Dec 9, 2014.

“If this lifts the ringgit to a stronger level vis-à-vis the US dollar and corporate earnings start to rebound, the outlook may begin to improve as time progresses,” Lim says, reminding that Corporate Malaysia has been investing to build new capacity over the last two to three years.

Addressing participants at Invest Malaysia, Bank Negara governor Tan Sri Zeti Akhtar Aziz said Malaysia “has over several decades demonstrated time and again the ability to emerge from commodity price shocks, financial crisis and the spillovers from the disruptions generated from other parts of the world”.

Having made the trip to Kuala Lumpur, foreign participants haven’t given up hope on Malaysia. But the heightened global uncertainties that are causing large and precipitous movements in global liquidity means Malaysia can ill afford to have the 1MDB elephant-in-the-room impact the country’s investability.

This article first appeared in The Edge Malaysia Weekly, on April 27 - May 3, 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.