Ringgit to soften in 2020 on local political risks: Fitch
PETALING JAYA: Fitch Ratings is maintaining its average forecast for the ringgit for 2020 and 2021 at RM4.25 and RM4.20 against the US dollar respectively, as domestic political risks remains a key downside factor for the currency’s short term outlook over the next three to six months.
In a statement, the ratings agency said the ringgit has mostly traded sideways in the weaker half of the short-term trading band since its last update published on Sept 26, bringing the year-to-date average to RM4.14/USD.
“We also expect domestic political risks to weigh on sentiment on the ringgit. Threats to the unity and therefore, continued rule of the Pakatan Harapan government which came to power in May 2018 have increased in our view.
“These risks stem from rising ethnic tensions, internal strife within Anwar Ibrahim’s Parti Keadilan Rakyat, as well as persistent uncertainty surrounding the promised handover from Prime Minister Mahathir Mohamad, to Anwar before the government’s term ends in 2023. Even if these risks do not completely materialise, the worsening situation is likely to have a negative impact on investor sentiment, which would weigh on the ringgit,” it said.
On the external front, Fitch said despite the likely support that a ‘Phase One’ trade deal would offer to emerging market currencies in general, a lasting and comprehensive resolution to the US-China Trade War is unlikely in 2020 before the US Presidential election and that re-escalation in the trade war remains a salient risk which would weigh heavily on risk assets such as emerging market currencies.
Meanwhile, over the long term, Fitch still expects the ringgit to trade in the weaker half of its long-term trading band between RM3.80/USD and RM4.50/USD.
“That said, we also believe 2021 would prove more conducive to negotiating a lasting and comprehensive resolution to the trade war. Economic hardship engendered by prolonged trade conflict would have fed through more strongly by then and sour sentiment in both countries about continuing the conflict.
“As such, we expect the ringgit to stabilise and strengthen slightly given the likelihood for a more stable US-China trade relationship. We therefore, also maintain our 2021 average forecast of RM4.20/USD,” it said.
In addition, two other factors are seen to provide support to the ringgit in 2021, namely stronger foreign investment and undervaluation in real effective exchange rate terms.
Fitch noted that while political risks in Malaysia remain, the government’s policy regarding foreign investment has become clearer since coming to power in May 2018.
“This is indicated by the successful renegotiation of foreignfunded infrastructure projects, as well as overall approved investment having risen 4.4% year-on-year for the first nine months of 2019. The brighter investment outlook is reinforced by the acceleration of the trend of companies relocating away from China to other manufacturing centres in Asia, Malaysia included, driven by the trade war.
“The expected increase in foreign investment is likely to see Malaysia’s net international investment position turn more negative and this has historically been supportive of the ringgit,” it said.
The undervaluation in real effective exchange rate (REER) terms of the ringgit will also provide some support over the long term, given the tendency for mean reversion, because countries with cheaper currencies are better able to export, all things equal, and import less, which would see the currency appreciate over time.
On the other hand, the weaker outlook for oil prices over the coming quarters is likely to cap ringgit strength in 2021.
“Our oil & gas team expects Brent crude prices to average steadily lower, from USD64/bbl in 2019, to USD62/bbl in 2020 and USD58/bbl in 2021 due to sluggish demand from a slowing global economy as well as the likely ineffectiveness of OPEC+ output cuts to further support prices,” said Fitch.