MALAYSIA, TRULY AWKWARD: BANKERS WARN OF ‘SPIRAL INTO VICIOUS’ CIRCLE AS SIMMERING POLITICAL CRISIS UNDERMINE CONFIDENCE IN RINGGIT, ECONOMY
An investor is not concerned about the potential political fallout on the ringgit as she expected the country’s leadership to remain “more or less status quo”.
Speaking to CNBC, Tan Min Lan said: “There are ongoing issues, but the opposition is in disarray and therefore there is no alternative. And hence a change in government in Malaysia is highly unlikely.”
Tan, who heads the Asia Pacific investment office for UBS wealth management, was reacting to strategists at the National Australia Bank (NAB).
According to NAB, the political turmoil does not herald good news for the Malaysian currency.
“The simmering political crisis remains and is likely to continue to undermine investor confidence with speculation about elections continuing to swirl,” it said.
NAB had made its forecast in a note titled “Malaysia – Truly awkward,” which is a sarcastic take on the country’s tourism advertising slogan, “Malaysia, truly Asia.”
With the ringgit continuing to slide against the US dollar, Tan remained positive of the situation.
“The current account position is very comfortable. The fiscal balance is very well managed. The monetary policy, as well, Bank Negara continues to have a very good standing with international investors,” she told CNBC.
Expressing concern over the high foreign ownership of Malaysia’s domestic bonds – at nearly 40 percent on some measurements – she however noted that the country was still rated single-A by the three major credit rating agencies Fitch, S&P and Moody’s.
“For emerging market investors, what they will compare Malaysia with is with your Turkey, and with South Africa and Brazil and Russia. Malaysia actually stacks up very well, if you look at all of the matrix,” she said.
Painting a bleaker picture, strategists at NAB expected the dollar would fetch as much as RM4.85 at the end of 2017.
NAB also noted the concerns over Bank Negara Malaysia’s warning to foreign banks to restrict trading in offshore non-deliverable forwards (NDFs) on the currency, which had fallen further than the spot rate.
CNBC stated that while the move appeared to be only a reinforcement of existing regulations, it had spooked traders.
“Markets tend to be more sensitive to tea-leaf reading over capital controls in Malaysia because the country was first to impose them during the Asian Financial Crisis,” it added.
NAB, it said, felt that even if Bank Negara assured it would not impose capital controls, it would not stem concerns about the possibility of that occurring.
“Capital controls would make it difficult or impossible for investors to remove cash from the country, making it less desirable as an investment destination,” it added.
“The Malaysian central bank’s attempt to use moral suasion to support its currency threatens to backfire, increasing pressure on the ringgit and potentially hurting growth.
“Part of the reason Bank Negara Malaysia resorted to this heavy-handed approach might be that foreign-exchange reserves are uncomfortably low after having been run down in 2014,” the report quoted NAB as saying.
NAB also warned that disrupting the NDF market might “cripple” companies’ ability to hedge foreign-exchange flows, which could have the knock-on effect of hurting exports, economic growth and the external balance.
“The risk of a spiral into vicious circle should not be easily dismissed,” the bank said.