Sound domestic factors to limit ringgit downside
MARC says further fall to be capped in the medium term
PETALING JAYA: While continuous capital outflow amid global uncertainties could exert downward pressure on the ringgit, further downside to the local currency could be limited by sound domestic factors, Malaysian Rating Corp Bhd (MARC) says.
In its report, the rating agency said downside of the ringgit could be capped in the medium term by the country’s strong economic fundamentals.
The fact that the ringgit remained below one-standard deviation from its long-term mean also suggested that its downside could be limited, it added.
“We believe that, aside from external factors, internal factors that determine the ringgit’s trajectory against the greenback would include the government’s medium-term deficit, debt reduction plans and economic growth trajectory,” MARC explained.
It noted that a further decline in net foreign holdings of Malaysian bonds and a continuing weakness in the yuan-to-US dollar exchange rate could exert some downward pressure on ringgit.
“It is noteworthy that statistics in the past two years show that a 1% drop in the yuan against the greenback is associated with a roughly 1.3% decline in ringgit-to-US dollar exchange rate,” MARC said.
According to MARC, with the Turkish lira plunging to new lows, the Chinese yuan continuing to trend downwards and the Indonesian rupiah falling to an almost threeyear low against the US dollar recently, there was now increasing concern over the possibility of a contagion across emerging-market currencies.
“A sudden turnaround in the global macro backdrop, underpinned by escalating trade wars, rising geopolitical risks, increasing interest rates in the US and greater uncertainties over the prospects of China’s economy, is slowly changing the trend of capital flows across the globe, denting the performance of financial markets in emerging-market economies,” it said.
The Malaysian bond market also experienced net capital outflows of RM16.9bil in the first seven months of this year. This was despite the positive net inflow recorded in July, its first in the past four months.
“The outflows had evidently led to a slide in the ringgit-to-US dollar exchange rate over the period,” MARC said.
“MARC believes that capital outflows occurred predominantly because of external factors, namely the strengthening of the US dollar against global currencies.
“The strength of the greenback was mainly supported by factors that include expectation of a faster-than-expected interest rate hike in the US and global economic uncertainty due to trade wars between the US and its trading partners, especially China,” it explained.
The US dollar index (against major currencies) strengthened by 6% during the period while Malaysia’s real effective exchange rate – the exchange rate against trading partners adjusted to inflation – barely changed.
Against this backdrop, MARC said, the ringgit had depreciated since hitting a high of RM3.86 per US dollar in February 2018. The ringgit was currently trading around RM4.10 against the greenback.
“The ringgit has also weakened in tandem with the value of the yuan against the US dollar,” it said.