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Ringgit Seen Dropping More Than 2%

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KUALA LUMPUR: The bad news just doesn’t stop for Asia’s worst-performing currency.

Already reeling from a renewed slump in oil prices and a political scandal that just won’t go away, the ringgit is now facing the prospect of another cut in interest rates. It’s the region’s biggest loser in the past month and analysts still see scope for it to drop more than 2% by year-end.

The currency’s slide highlights all is not well as the nation’s economy heads for its worst performance this decade.

Crude oil’s plunge to a four-month low this week undermines the finances of net oil exporter Malaysia, while the appeal of its relatively high bond yields is being tempered by the scandals surrounding a troubled state investment fund. Rabobank Group and UBS Group AG both predict Bank Negara will add to its first rate cut in seven years in coming months.

Another rate reduction “will be a further negative for the currency because one of the things that’s attractive about it is it’s got a relatively high yield,” said Michael Every, head of financial markets research at Rabobank in Hong Kong.

July’s easing was a “pre-emptive move” and there are no current plans to adjust rates again over the next few meetings, although policy makers will look at data to see what is needed, central bank Governor Datuk Muhammad Ibrahim told Bernama on July 14 and added Malaysia is able to absorb external shocks should the global economy deteriorate.

Brent crude’s 13% slump this quarter is exacerbating Malaysia’s woes. Sliding energy prices have eroded export earnings and rising costs are curbing business investment. Economic growth slowed to the least in more than six years in the first quarter, and analysts project it will ease to 4.2% for the year as a whole, the least since 2009.

The outlook for the currency is linked to oil prices as Malaysia derives 20% of its revenue from energy-related sources. The nation loses RM450mil in annual income for every US$1 decline in oil, the prime minister said in April.

The ringgit has dropped 1.3% in the past month, underperforming its regional peers which all recorded gains except for the Philippine peso and Indonesia’s rupiah. The currency traded at 4.051 per dollar as of 7.56am in London yesterday. It was as strong as 3.142 in August 2014, when oil was still above US$100 a barrel.

The ringgit will weaken to 4.10 per dollar by the end of September and 4.15 by year-end, according to the median estimates of analysts surveyed by Bloomberg.

Bank Negara unexpectedly cut its benchmark interest rate by a quarter point to 3% on July 13 to bolster growth, and analysts say pressure is building for another move.

UBS projects the central bank will make another quarter-point rate cut by early next year and the ringgit will weaken to 4.40 per dollar by the end of December. – Bloomberg

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