PETALING JAYA: A
sustained outflow of foreign funds from the equity and debt markets
continued to pile pressure on the weakening ringgit as the local
currency fell to a nine-year low against the US dollar.
The ringgit declined 1.4% yesterday to 3.772 versus the greenback.
“In times of exchange rate volatility, the ringgit tends to overshoot,” independent economist Lee Heng Guie told StarBiz.
“Though the ringgit is considered to be fundamentally undervalued based
on the real effective exchange rate index, weak sentiment would drive
the currency to test the 3.80 peg level,” he added.
Lee said the ringgit’s persistent weakness against the US dollar was driven by both fundamental and sentiment factors.
“The reality is that fundamentals for the US
dollar are compelling – the US economic recovery and steady corporate
earnings are the pull factors for capital flows,” he said.
Foreign investors were net sellers on Bursa Malaysia for the past six consecutive weeks, MIDF Research said yesterday.
The firm estimated that cumulative net
foreign outflow in 2015 had reached RM6.7bil as of end of last week.
This is reaching the same amount of RM6.9bil that left the market in
2014.
“We estimate that there is still an overhang
of about RM15bil and RM20bil of foreign portfolio on Bursa Malaysia,”
MIDF Research said.
The weak sentiment could lead to further
weakening of the ringgit which has already depreciated about 8%
year-to-date against the greenback.
It is the region’s second worst-performing currency behind the rupiah.
In response to Bloomberg, Bank
Negara governor Tan Sri Dr Zeti Akhtar Aziz said emerging market
currencies, including the ringgit, continue to be affected by
uncertainties in the external environment.
“For most emerging economies, the weakness
in their currencies is inconsistent with the prevailing economic
fundamentals and their economic growth prospects.
In this environment, the ringgit is now
trading at levels that are not reflective of the fundamentals of the
Malaysian economy,” she said.
At the current value against the US dollar,
the ringgit was trading at levels last seen during the 1997-1998 Asian
Financial Crisis when Malaysia was experienced a major recession.
It was during that time that foreign
exchange reserves were low, financial markets had plummeted, several
financial institutions were in distress and the current account of the
balance of payments was in deficit.
“None of these extreme conditions are
prevailing today. Malaysia’s current economic fundamentals are now
markedly different,” she said.
“It is therefore expected that the current
weakness of the currency will be temporary and that fundamentals will
prevail once the uncertainty affecting market sentiment subsides.”
Zeti said the exchange rate was not an instrument of monetary policy nor a tool to gain competitiveness.
“The (central) bank however stands ready to
maintain orderly conditions in the foreign exchange market. More
fundamentally, the focus of our policies is to promote macroeconomic
stability, a resilient financial system, maintain strong buffers and
ensure a long lasting growth that is sustainable. This has been and will
continue to be the policy approach that will enable Malaysia to weather
such challenging episodes,” she said.
Meanwhile, Malaysian Rating Corp Bhd (MARC)
chief economist Nor Zahidi Alias said there was an increasing pressure
on the ringgit.
“However, I believe that the international
rating agency’s decision on Malaysia’s sovereign rating will be key to
the next trend of ringgit vis-a-vis the US dollar although this may just
be sentiment driven,” he said.
Zahidi said the overall strength of the US
dollar – which includes against the ringgit – was largely associated
with the US economy which, despite a lacklustre performance in the first
quarter of 2015, would likely continue to strengthen throughout the
year.
He noted that based on past experiences, a
typical US dollar rally lasts six to seven years, and if this trend
continues, US dollar will remain relatively strong across the board for
another two to three years.
Zahidi said the performance of ringgit
against the US dollar hinged on several factors including the outlook of
global crude oil prices, level of the country’s current account
surplus, decisions by international rating agencies on Malaysia’s
sovereign rating as well as the possible rate hike in the US which will
influence the direction of capital flows in this region, Malaysia
included.
“As the proportion of foreign holdings of
government bonds is relatively high in Malaysia, a reversal in capital
flows will naturally affect the ringgit performance against the US
dollar. All these factors have capped the upside for the ringgit at this
juncture,” he said.
Lee said while the ringgit was expected to
stabilise once negative sentiment towards it fades, investors would be
focusing on Malaysia’s medium-term growth prospects and also to assess
whether the ringgit will continue to provide attractive returns from
both a yield and appreciation standpoint in the face of higher US
interest rate going forward.
“A two-way capital flows will continue to
influence the ringgit, along with the level of economic growth,
inflation differential, the current account balance, political and
institutional factors,” Lee said.
- The Star 9-June-15
