‘RINGGIT TO ESCAPE EMERGING MARKET CURRENCY WOES’
Healthy current account, strong foreign reserves to provide comfortable cushion, says analyst
THE ringgit is not expected to face any contagion risk from the sharp decline in value of emerging market (EM) currencies, which has already hit Argentina, Turkey, India and Indonesia.
The EM currencies as represented by the MSCI Emerging Market Currency Index has tumbled by more than eight per cent against the US dollar over the past six months, with the Argentine peso and Turkish lira the worst hit, plummeting more than 59 and 44 per cent, respectively.
The negative sentiment has weighed on other Asian currencies such as the Indian rupee, rupiah and Philippine peso.
The ringgit has depreciated by more than seven per cent since April.
Fundsupermart.com analyst Jerry Lee Chee Yeong wrote in his research note that Malaysia’s currency was comparatively safe from being caught up by the contagion effect.
“Despite the fiscal deficit that the Malaysia is facing right now, we believe the healthy current account as well as strong foreign reserves are likely to provide Malaysia with a comfortable cushion against external uncertainties,” he said.
Lee said although EM capital flows in term of portfolio or other investment flows might face a squeeze due to the escalating volatility and tightening global liquidity, those countries with strong support from foreign direct investments such as Malaysia and Thailand were likely to survive increased volatility in the global financial market.
He said those businesses that started over the last few years were unlikely to pull out their investments due to short-term uncertainties.
“As such, the valuation of ringgit has become even attractive as a result of the recent EM currency turmoil,” he added.
Meanwhile, the United States Federal Reserve (Fed) rate hike decision would be another factor that may drag the ringgit lower.
“Although we are not expecting Bank Negara Malaysia to increase interest rate as aggressively as the US Fed, which may pose downside risk to ringgit, one should note that Malaysia is way ahead of others in normalising the interest rate right after the 2007/08 financial crisis,” said Lee.
He said the US interest rate hike, which would lead to foreign fund outflow, was likely to have a minimal impact on Malaysia.
“Reason being, on the fixed income side, as the current real yield offered is increasingly attractive, we believe foreign investors might spot opportunities in the local bond space as what saw in July, given that the current foreign holdings in Malaysia debt securities is still below the twoyear average.”