Malaysian Ringgit Under Pressure - Another Crisis?

Includes: EWM
by: Reid K.

By Mireille Bisnaire

Malaysia has been suffering from a downward pressure on the ringgit over these last several months. Analysts say this is due to a strengthening US dollar, as well as falling commodity prices.

This trend is predicted to continue alongside movements in bond markets and issues with the country's fiscal budget, the latter which is expected to only batter the currency even more.

Currently, the ringgit floats at around 3.75 against the US dollar, just a little above 3.8, where it was pegged against during the Asian crisis.

Is This a Crisis for the Ringgit?

According to some analysts, the ringgit's free fall is mostly due to market adjustments. Saktiandi Supaat, Maybank's head of FX Research, explained that "domestic issues in terms of political uncertainty, and also issues in the contingent liabilities side of things, creates a bit uncertainty largely through the bond market - because Malaysia has a significant proportion of foreign ownership of the bonds."

Supaat also explained that Malaysian Government Securities (MSG), and any significant changes in sentiment toward them, usually has an impact on the bonds' flow and could significantly shift the ringgit's volatility to the weaker side.

Experts say that even if macro conditions lead the ringgit down to 3.8 against the dollar, this should not be that big of a concern as economic conditions today are much more stable than those during the crisis.

Sim Moh Siong, director and FX strategist at the Bank of Singapore mentioned "If you look beyond the ringgit slide, the financial conditions in Malaysia today are much more supportive compared to what we have seen in the Asian Financial Crisis."

Sim also pointed out that even though the 3.8 level is often cited today as the peg level, it is more of a psychological key number than anything else. For him, the ringgit depreciation and the financial conditions have been quite orderly: there is no crisis in today's context.

The ringgit has also been sliding continuously against the Singapore dollar, trading at near all-time lows. On June 11th, the ringgit was trading at 2.78 to the Singapore dollar. According to analysts, this number is to stay around 2.7 near year-end but could potentially rise to 2.8 in the short term.

Singaporeans are taking advantage of this opportunity, as it can be seen in the increasing number of incoming flows of tourists to Malaysia. According to Malaysian travel agencies, the month of June has seen a peak of 10% in bookings for holiday packages compared to last year.

Some money changers said the demand for ringgit doubled between the end of May and beginning of June, compared to the month of April. A few of them even ran out of ringgit as large number of Singaporeans rushed to exchange their Singapore dollars.

We at InvestAsian expect the ringgit to underperform, even when compared to other regional currencies in ASEAN and East Asia such as the Thai Baht and Japanese Yen. We suggest holding a minimal amount of the currency if possible.