More downside for ringgit unless...

Malaysia needs to resolve its domestic issues in order to boost investor confidence and this would help stem the decline in the ringgit

KUALA LUMPUR: Malaysia needs to resolve its domestic issues in order to boost investor confidence and this would help stem the decline in the ringgit.

BIMB Securities Research said on Wednesday the downside of the Ringgit can be attributed to firstly, declining oil prices, which contributed about 30% to government revenue.

Secondly, the expectations of a slowdown in China and its currency policy and concerned on the equity markets that have dampened sentiments thus reducing the allure for emerging market currencies.

Thirdly, rising demand for the USD in anticipation of the Fed normalising its monetary policy; and fourthly concerns over the domestic political situation.

“Moving forward, we expect the ringgit to stay weak in the near term given the headwind of US interest rate hike and the large foreign holdings of fixed income instruments in the country.

“In addition, it is important for the country to resolve its domestic issues in order to boost investor confidence,” said the research house.

BIMB Research does not expect Bank Negara to intervene heavily again in the foreign exchange markets but merely intervene to smoothen the depreciation of the Ringgit, as it needs to preserve the foreign exchange reserves in order to maintain investor confidence.

The research house highlighted that total debt securities reported net foreign outflows of RM8.9bil in August, bringing down total foreign holdings of Malaysia’s total debt securities to RM197.8bil from RM206.8bil in July.

“The latest foreign holdings were the lowest level since June 2012 (RM187.4bil). MGS became the casualty of outflows,” it said.

In August, foreign investors reduced their holdings of the MGS to RM157.4bil (July: RM165.4bil; June: RM166.8bil) or 46.4% (July: 47.8%; June: 48.5%) of total MGS outstanding in the market.

However, foreign holdings of GII increased slightly to RM8.7bil (July: RM8.2bil; June: RM9.8bil) or 4.3% (July: 4.0%; June: 4.7%) of the total GII outstanding.

Year-to-date (as at end-August), outflows from total debt securities now total RM28.1bil, and with foreigners net sold RM15.8bil of equities, this means a total portfolio outflow of RM43.9bil for equities and debt securities combined.

“Market will continue to keep a close eye on upcoming MGS maturities and also other debt securities in the coming months and with the ringgit remains soft, we expect to see cautious trading sentiment in ringgit govvies space.

“Nevertheless, a cheaper ringgit combined with higher relative yields could be seen as attractive entry to lure offshore investors

Over the same one-month period, the ringgit weakened considerably against the US$ by a massive 9.4% to 4.1925 and year-to-date, the ringgit fell by 19.4% against the US$.

The fall in the ringgit so far this year was broadly in line with weaknesses seen in regional currencies and some major currencies as well as commodity base economy currencies.

Malaysia foreign exchange reserves posted a smaller drop of USD2.0bn in August to US$94.7bil as at Aug 28, compared with a sharp decline of US$8.8bil in July.

This suggests that Bank Negara may have toned down their pace of intervention, as past interventions had posed a significant drain on reserves.

In ringgit terms, the foreign exchange reserves fell by RM7.0bil in August to RM357.7bil as at Aug 28, after falling by RM33.4bil, the single largest monthly loss in almost seven years in the previous month.

Year-to-date, external reserves fell by -14.8% from US$111.2bil in January 2015.