Friday, August 14, 2015

Ringgit will continue to head south

Growing concerns over a corruption scandal involving Prime Minister Najib Razak and the Malaysia’s foreign exchange reserves dropped below US$100 billion as at the end July sent the ringgit crashing to 17-year lows against the greenback today.

Malaysia’s central bank, Bank Negara Malaysia, announced Friday that its international reserves amounted to 364.7 billion ringgit (96.7 billion U.S. dollars) as at the end of July the lowest level since 2010. A fall below the psychological US$100 billion level could put additional pressure on the ringgit.

The ringgit fell to 3.929 to the United States dollar – its weakest since September 1998, when it reached 3.9340. Malaysia set the peg at 3.8000 at the time, amid the Asian financial crisis.

BNP Paribas said the central bank has used an estimated US$40 billion since April 2013 to shore up the ringgit, raising questions over how heavily it can continue to support the ringgit. The intervention is probably limited to preventing excessive volatility rather than defending a certain level for the ringgit.

As the central bank struggles to slow declines in Asia’s worst-performing currency in the face of a protracted political crisis, Societe Generale said the defense of the exchange rate may stop at about the US$90 billion reserves mark, the bank revised its ringgit forecast for the third quarter to 4.1000 from 3.8000.

A slump in oil prices, a deepening political scandal, and the prospect of higher US interest rates underpinning a strengthening dollar have contributed to the ringgit’s 12.3 per cent loss this year.

Business operating costs have escalated dramatically on the back of a new minimum wage, power tariff hikes and the goods and services tax. Investors are keeping a close eye on its narrowing balance of payments, increasing budget strains caused by weaker commodity prices, as well as on its international reserves, which continue to head south.

The ringgit is suffering from a confidence deficiency that the currency could be further eroded if public and investor confidence are not quickly restored.