NO FREE LUNCH FOR NAJIB: ‘BEST FRIEND’ CHINA OR NOT, RINGGIT KEEPS INVESTORS AWAKE AT NIGHT

During the Trump Tantrum last November, Malaysia’s central bank asked foreign banks to stop trading the ringgit in the offshore non-deliverable forwards market. Soon after, the central bank said exporters must convert 75% of their earnings into the ringgit.
Instead of calming the markets, these capital control measures “elevated concerns on the Ringgit among foreign investors,” noted Credit Suisse‘s strategist Tan Ting Min. Min sees the ringgit falling to 4.55 against the U.S. dollar in 12 months.

There are a lot of things Credit Suisse dislikes about ringgit. First of all, foreign investors hold 48% of Malaysian government bonds, with 47 billion ringgit maturing this year, a 50% rise in volume from 2016. “We also worry over the risk of a weight reduction in the GBEM Global Diversified index (9% weighting) if poor forex hedging liquidity persists,” notes Min. Foreign banks tend to use the forward markets to hedge against currency declines.

China is now Malaysia’s best friend, bailing out the troubled sovereign fund 1MDB. “But there is no such thing as a free lunch.”

Malaysia has been underperforming for three consecutive years as foreigners became net sellers. Domestic institutions related to the Malaysian government have been buying in the place of foreigners, but how much more support can the “national team” provide?

“On the political front, Prime Minister Najib is here to stay. If PM Najib survived the very turbulent 2015 and is still helming Malaysia, then his intention to remain the Prime Minister is clear. Political stability is good news for the stock market but many would argue that there is a lot of ‘anger’ in Malaysia. Most Malaysians feel increasingly dissatisfied with the direction that the country is heading towards,” wrote Credit Suisse.

– http://blogs.barrons.com/