Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on May 20, 2019 - May 26, 2019

THE ringgit is expected to gradually recover and rally towards the end of the year aided by initiatives announced by Bank Negara Malaysia to address concerns surrounding the country’s foreign exchange and bond liquidity.

“The initiatives, backed by strong underlying fundamentals of the country, will give support to the ringgit,” says an observer.

Currency analysts are more optimistic on its prospects, with one forecasting the local unit to appreciate to 3.80 to the US dollar, from 4.17 at present, come year end.

When releasing first-quarter gross domestic product figures last week, central bank governor Datuk Nor Shamsiah Mohd Yunus announced a set of initiatives aimed at enhancing market liquidity as well as accessibility to the domestic financial markets.

The measures are also expected to partly address the issue of Malaysia being placed on the watch list of FTSE Russell’s World Government Bond Index (WGBI), a placement that risks the exclusion of Malaysian debt from its bond index.

The cloud of uncertainty had prompted a surge in foreign fund outflows amounting to RM11.2 billion last month. Foreigners sold RM9.8 billion of Malaysian debt securities and offloaded RM1.4 billion of equities, a reaction many experts suspect was partly due to FTSE Russell’s surprise announcement.

Ray Choy, regional head, treasury and market research at CIMB Investment Bank Bhd, emphasises that the new measures should not be contextualised solely within the WGBI issue but should be seen as a progressive step forward towards market-friendly initiatives.

The move to enhance liquidity and accessibility in the financial markets were applauded by industry observers, with many hopeful that it will help the ringgit’s recovery.

“Our research house is very positive about the measures announced by Bank Negara. We are targeting the ringgit to strengthen to 3.80 against the US dollar by the end of the year,” says RHB Research economist Vincent Loo.

“We expect to see a rally later in the year,” adds Loo, who is also hopeful that the measures will be enough to stem the foreign outflows the market has been experiencing.

Maybank Investment Bank Research says it expects the Malaysian authorities and central bank to continue to address FTSE Russell’s concerns. The research house expects the ringgit to gradually strengthen to 4.10 by the end of the second quarter of the year.

“We view these initiatives as positive developments. They are a continuation of Bank Negara’s disciplined approach and commitment towards broadening and deepening the onshore financial markets. Investor confidence should gradually return and ringgit-denominated assets should see their appeal grow,” says the research house.

In a separate fixed income report, Maybank IB Research opines that the timing of the announcement would provide the central bank with ample time to assess the impact of these new measures on market liquidity.

Many were expecting Bank Negara to lift the ban on offshore non-deliverable forward (NDF) US dollar-ringgit trade. Instead, it has turned its focus on developing the onshore market by expanding the pool of investors allowed under the dynamic hedging programme.

“The dynamic hedging programme is similar to hedging through the NDF market. So, what we are doing through the dynamic hedging programme is to improve its accessibility to include custodian banks and trust banks. They will be able to register with Bank Negara and undertake dynamic hedging as well. The dynamic hedging market is more transparent compared with the NDF market,” said Shamsiah.

RHB’s Loo says, as the dynamic hedging programme will be done in Malaysia, it will allow the central bank to be more aware of what is happening with the ringgit as compared to the offshore market.

Other measures announced include improving the repo market marking activity, enhancing delivery for Malaysian Government Securities futures settlement, increasing flexibility for investors to enter forward contracts to buy the ringgit, introducing standard documentation for foreign exchange transactions and enhancing provision of ringgit liquidity beyond local trading hours.

Choy opines that the measures will need time to take effect, but they are likely achievable in the near term. “While this may improve market liquidity, it is also a function of risk sentiment, which is likely to overarch given ongoing external headwinds in the global economy.”

Following the announcement, the ringgit strengthened to an intraday high of 4.1565 against the US dollar on May 16. However, it seems to have lost its momentum, and was trading at 4.1745 at the time of writing.

According to Choy, the direct correlation between the ringgit and the announcement has been moderated by ongoing risk aversion across the global market.

“Furthermore, these measures are structural in nature and the market impact would be broadly imputed, rather than observable over a couple of days,” he says.

Moreover, the ringgit has also been impacted by the US-China trade spat and resulting uncertainties.

“This is a major near-term risk, not just to Malaysia but to regional currencies. The pressure on currencies is still there,” says Socio Economic Research Centre executive director Lee Heng Guie, who expects the ringgit to end the year at 4 to 4.15 against the US dollar.

Just a week ago, the US went ahead with its tariff increase to 25% on US$200 billion worth of Chinese imports. China has retaliated and, starting June 1, will increase tariff rates by between 10% and 25% on US$60 billion of imports from the US.

That said, economists are still hopeful that the US and China will be able to strike a deal, even though attempts a week earlier proved futile.

“Since it’s now May and there’s half a year to go, I’m hoping that a trade deal can be concluded this year. Otherwise, this trade war could turn into the worst-case scenario where US imposes further tariffs on the remaining US$290 billion worth of Chinese goods,” says Loo.

As of now, despite the risk to growth being tilted towards the downside because of the external uncertainties, Bank Negara is maintaining its GDP growth forecast of 4.3% to 4.8% for 2019.

“In our baseline scenario, we have already imputed even the recent 25% tariffs and even beyond that,” said Shamsiah.

 

GDP growth slowed to 4.5%

For the first quarter of the year, Malaysia’s GDP growth slowed to 4.5% compared with 4.7% in 4Q2018. The slower growth was weighed down by weak investment activity. Private investment growth fell to 0.4% from 5.8% in the previous quarter while public investment contracted further by 13.2% from 5.9% previously.

Unsurprisingly, private sector consumption growth moderated to 7.6% from 8.4% in the previous quarter but remained firm. The central bank expects consumer spending to moderate going forward but highlights that it will be supported by income and employment growth.

Export growth also slowed to 0.1% after increasing to 3.1% in the previous quarter, dragged down by declines in commodities while imports contracted 1.4% compared with a 1.8% growth previously.

Despite the slower first quarter, economists are confident that growth will pick up in the second half of the year, enabling the GDP growth target to be achieved.

“We believe there are still sufficient catalysts for Malaysia to achieve a GDP growth of 4.7% in 2019. Transitory drags from public investments are expected to abate amid the conclusion of public sector project reviews and revival of megaprojects, including the East Coast Rail Link (ECRL) and Bandar Malaysia. The strong pipeline of investment approvals last year could still manifest as the domestic policy landscape settles down. In addition, a recovery in mining output remains on track for 2H2019,” says CGS CIMB Research in a report.

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