This article first appeared in The Edge Malaysia Weekly, on December 21 - 27, 2015.    

JUST a year ago, the suggestion that one George Washington bill could yield RM4 to RM5 sounded preposterous to many as the ringgit was hovering at 3.40 levels. The last time the ringgit breached 4 to a US dollar was in 1998, at the peak of the Asian financial crisis, and the benchmark was 3.80 to the greenback, the level of the ringgit peg between September 1998 and July 2007.

Yet, what sounded preposterous came to past as the ringgit skidded by a fifth to 4.4812 to the US dollar intraday on Sept 29, 2015, by which time the pundits began whispering RM5 and “capital controls” as they saw similarities with the 1997/98 crisis.

Cumulatively, foreign outflows totalled RM18.5 billion up to Dec 7, according to MIDF Research. This is almost three times last year’s RM6.9 billion.

Key government officials were swift to reassure that Malaysia’s fundamentals remain strong and the government is not considering capital controls as conditions do not warrant such a drastic measure.

They might be partly right. As at Dec 18, the ringgit was at 4.2857 to the US dollar, 3.0343 to the Singapore dollar, 6.4039 to the pound sterling, 4.6387 to the euro and 0.66123 to the renminbi. At its weakest intraday level on Sept 29, the ringgit hit a new all-time low of 3.1299 to the Singapore dollar, 6.7995 to the pound sterling and 5.0504 to the euro.

According to Affin Hwang Capital in a Dec 4 strategy report, the ringgit could track higher towards 3.90 next year, based on Malaysia’s sound economic fundamentals and the possible winding down of 1Malaysia Development Bhd (1MDB).

That the ringgit could fall so much so fast sent the country into a tizzy, especially in the vibrant digital space. Everyone, from housewives to investment bankers, were suddenly experts on what the ringgit would fetch next.

And the weaker ringgit had a lot to do with the weak commodity prices. Malaysia, a net oil and gas exporter, derived about 41.3% of its revenue from crude oil in 2009 when oil prices were at the peak. The current situation does not point to a recovery in the crude oil market, with the Organization of the Petroleum Exporting Countries still producing at a high rate.

While the government has expanded its revenue sources, including the implementation of the Goods and Services Tax (GST), oil-related revenue remains significant at about one-fifth of income — thus the concerns over whether the country will be able to continue meeting its self-imposed fiscal deficit targets.

Earlier in the year, the country’s fiscal deficit target for 2015 was revised to 3.2% from 3% in light of the sharp fall in crude oil prices. For next year, the target is 3.1% even as the government works harder at reducing its operating expenses.

Crude oil has fallen about a third from US$115 per barrel in June 2014. At the time of writing, Brent crude oil was hovering at US$37 per barrel — lower than the US$48 assumed in Budget 2016. Oil made up 30% of revenue in 2014 but is expected to further decline to 19.7% in 2015, according to the 2015/16 Economic Report.

Besides the weakness of crude oil prices, the political turmoil this year should also take a fair share of the blame on the adverse effects on the ringgit. The 1MDB controversy also took a toll on investor confidence, and in turn, the ringgit.

As at Dec 18, the ringgit remains the worst performing currency among Bloomberg’s basket of 10 Asian currencies, skidding 18.55% against the US dollar. Comparatively, Indonesia’s rupiah slid 11% against the greenback, the Thai baht slid 9.03%, the Singapore dollar slid 6.25% while the Philippine peso eased 5.56%.

Against the Bloomberg basket of emerging countries, the Philippine peso, Singapore dollar and Thai baht were ranked among the top 10 currencies with best spot returns while the Malaysian ringgit was ranked sixth worst performing, ahead of the Turkish lira, South African rand, Columbian peso, Brazilian real and Argentine peso.

Looking ahead into 2016, most forecasters on Bloomberg expect the ringgit to hover at the 4.30-4.40 range to the US dollar in 2016.

Morgan Stanley’s forecast stood out, as it estimated the ringgit to hit 4.66 to a dollar in the first quarter of 2016 and weaken to 5 to the greenback in 4Q2016. Maybank Singapore and Mizuho Bank are a lot more bullish, forecasting the ringgit firming to 3.95 and 3.90 to the US dollar respectively in the coming months. Even if the bulls are right, their forecasts means no one expects the ringgit to bounce back to pre-2015 levels just yet.

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