Pressure on ringgit

Foreigners hold about 40% of MGS, making ringgit vulnerable to sell-off

PETALING JAYA: Alarm bells are ringing among developing countries in Asia as potential huge outflow of foreign speculative funds threaten to wreak havoc across financial markets in the region.

A taste of what is to come was felt last month when the ringgit took a big hit, falling 4.1% against the US dollar, in tandem with sharp declines among regional currencies against the US dollar.

“Investors’ appetite for risk may begin to drop as the US policy becomes less accommodative and prospects for the first interest-rate hike become imminent,’’ RHB Research Institute said in a report.

But the local bourse was spared the brunt of the selldown, as foreign fund managers are relatively light on Malaysian equities. The bulk of their holdings of local assets are concentrated in the bond and money market.

It was estimated that overseas investors hold about 40% of Malaysian Government Securities (MGS).

“Given the high foreign holdings of MGS, Malaysia is indeed vulnerable to further outflows once the US Federal Reserve (Fed) starts to tighten,’’ economists at MIDF Research said in a note.

A banker said that based on previous trends, foreign shareholding of bonds tended to drop to 30% of the total MGS if there was flight of

capital back to the United States.

“So the risk of a sell-down by foreigners should the United States raise interest rates persists,” said the banker.

According to statistics by Bank Negara last week, foreign investors trimmed their holdings on MGS by RM5.68 bil to RM148.3 bil as at end of August from a record RM154 bil held in July.

The pace of the sell-off appeared to have quickened in September. The ringgit, which tumbled 4.1% against the US dollar, and the rupiah were among the worst hit currencies in Asia.

“Fund outflows in the third quarter of 2014 is likely to be much bigger than that seen post-sell off in May 2013 and in January this year when the United States started the taper programme,’’ MIDF Research said.

Foreign investors were net sellers of Malaysian equities last month as the FTSE Bursa Malaysia KL Composite Index dropped 1.36% to 1,840 points last Friday.

In Jakarta, the exodus of foreign funds from the stock market reached US$616 mil in September, the biggest outflow since June 2013.

Credit Suisse saw the retreat in September as “first signs of foreign investor capitulation’’ following months of optimism that made several stock markets in the region among the best performing in 2014.

But the recent sell-off, which began in earnest in August, was less dramatic compared to the one that hit emerging markets in the middle of 2013.

Then, global investors rushed their exit after Fed chairman Ben Bernanke said the easymoney policy that fuelled soaring stock prices in developing Asia will be tapered down, signalling the end of easy monetary policy regime.

Janet Yellen, who took over from Bernanke in February this year, has alluded that the normalisation of monetary policy will not happen so soon as she wanted to see more definite signs such as lower unemployment rate in the United States.

The Fed is scehduled to complete tapering of asset purchases this month but the timing of the first rate hike by the Fed remains a big uncertainty.

Market expectation as well as statements by Fed officials suggest that the tightening cycle could start as early as middle of 2015.

Bank Negara had refrained from raising interest rate in September despite expectation it will continue to tighten following the first rate hike since 2011 in July.

“Bank Negara may want to save bullets for next year,’’ MIDF Research said, arguing that raising interest rates now “may not be the best option... to stem the outflow.”

The view is that the central bank is under no pressure to defend the ringgit as long as the ringgit’s movement is not in misalignment with other regional currencies.

“We see the rise in US dollar as a reflection of the stronger performance of the US economy, rather than a sign of increased risk aversion in the financial markets,’’ strategists at Schroder Investment Management Ltd wrote.