Ringgit victim of ‘poor perception’
Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz was in the media spotlight recently. The press conference following BNM’s release of its 2014 annual report became a spirited question-and-answer session focusing on the depreciating ringgit, said to be linked to falling oil prices and the 1Malaysia Development Bhd (1MDB) controversy.
Grilled by the foreign and local press, Zeti reiterated at the media conference on March 11 that the ringgit was “significantly undervalued” given the country’s steady growth prospects and strong economic fundamentals. Raphael Wong of The Ant Daily reports:
She sought to provide reassurance the economy is not as bad as it is perceived to be, following the fall in oil prices. In fact, at an editor’s briefing a day earlier, Zeti attributed the ringgit’s fall – to RM3.70 to the US dollar – to a perception of economic uncertainty.
“The financial markets really thrive on volatility so they look for opportunities to generate volatility. As an economy, we need these strong fundamentals; so in uncertain times like this, we are able to ride things out,” Zeti said, adding the country has a steady growth path, high international reserves and a developed financial system.
On March 10, the ringgit slid past the 3.70 mark against the greenback, falling lower than most analysts’ predictions. A day after Zeti’s briefing, markets had yet to react positively to the central bank’s reassurance.
The ringgit, which still hovers around the 3.70 mark, has fallen as much as 17.6% against the US dollar since August.
Announcing the country’s Q4 GDP figures in mid-February, Zeti said: “Concerns related to the global growth outlook and the significant decline of oil prices since September 2014 has led to large non-resident portfolio outflows from Malaysia, amounting to US$18.6 bil [RM68.6 bil], which has contributed to some of the adjustment to the ringgit.”
Khoon Goh, senior foreign exchange strategist, Australia and New Zealand Bank (ANZ) in Singapore, agrees with BNM the ringgit is undervalued and that market perceptions are overdone.
“Nonetheless until we see more evidence in the economic data, I think concerns will linger. I totally agree the ringgit is undervalued, if based on economic fundamentals. Even with oil prices where they are, the ringgit has weakened a lot more than fundamentals suggest.
“The reason for this is the negative sentiment of foreign investors. So until we get resolution around these uncertainties, it is very hard for the ringgit to correct to more fundamental values.”
Another uncertainty Goh highlights relates to the shadow cast by 1MDB. He says the lack of transparency and political elements surrounding the issue have not helped the ringgit, especially with the recent announcement that the government’s debt guarantee to the government- owned entity was RM$5.8 bil.
“Until we get a lot more clarity around this issue, I think it will be very hard for markets to ignore 1MDB because the worst-case scenario would be the government will be forced to absorb the entire obligation. This means the debt to the gross domestic product will rise – and it’s already close to its ceiling. That is the general concern of the market.”
Zeti has dismissed an imposition of capital controls and repegging of the ringgit to the dollar. She added there is a need for the flexibility to adjust.
Goh concurs, saying Malaysia does not require desperate measures. “What we have here is a matter of negative offshore-investor perception. If they can overcome these negative perceptions and get a credible resolution to 1MDB, I think we will see the ringgit rally and foreign investors who have been selling Malaysian assets will return.”
He adds the central bank is doing everything to restore confidence in the economy. “I think the growth expectations of the economy are very fair. It is really not its [BNM’s] responsibility to deal with 1MDB. So all it can do is monitor the financial system and ensure it can weather any potential negative shocks.”
Goh predicts Malaysia is likely to be exposed to falling liquefied natural gas (LNG) prices. He says as LNG constitutes 6% of the GDP, the country is expected to be affected by the lower price. LNG prices, he explains, tend to lag behind oil prices by about five months.
For full story, go to www.focusmalaysia.my, which also targets other Malaysian businesses.