PETALING JAYA: A sustained outflow of foreign funds from the equity and debt markets continued to pile pressure on the weakening ringgit as the local currency fell to a nine-year low against the US dollar.
The ringgit declined 1.4% yesterday to 3.772 versus the greenback.
“In times of exchange rate volatility, the ringgit tends to overshoot,” independent economist Lee Heng Guie told StarBiz. “Though the ringgit is considered to be fundamentally undervalued based on the real effective exchange rate index, weak sentiment would drive the currency to test the 3.80 peg level,” he added.
Lee said the ringgit’s persistent weakness against the US dollar was driven by both fundamental and sentiment factors.
“The reality is that fundamentals for the US dollar are compelling – the US economic recovery and steady corporate earnings are the pull factors for capital flows,” he said.
Foreign investors were net sellers on Bursa Malaysia for the past six consecutive weeks, MIDF Research said yesterday.
The firm estimated that cumulative net foreign outflow in 2015 had reached RM6.7bil as of end of last week. This is reaching the same amount of RM6.9bil that left the market in 2014.
“We estimate that there is still an overhang of about RM15bil and RM20bil of foreign portfolio on Bursa Malaysia,” MIDF Research said.
The weak sentiment could lead to further weakening of the ringgit which has already depreciated about 8% year-to-date against the greenback.
It is the region’s second worst-performing currency behind the rupiah.
In response to Bloomberg, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said emerging market currencies, including the ringgit, continue to be affected by uncertainties in the external environment.
“For most emerging economies, the weakness in their currencies is inconsistent with the prevailing economic fundamentals and their economic growth prospects.
In this environment, the ringgit is now trading at levels that are not reflective of the fundamentals of the Malaysian economy,” she said.
At the current value against the US dollar, the ringgit was trading at levels last seen during the 1997-1998 Asian Financial Crisis when Malaysia was experienced a major recession.
It was during that time that foreign exchange reserves were low, financial markets had plummeted, several financial institutions were in distress and the current account of the balance of payments was in deficit.
“None of these extreme conditions are prevailing today. Malaysia’s current economic fundamentals are now markedly different,” she said.
“It is therefore expected that the current weakness of the currency will be temporary and that fundamentals will prevail once the uncertainty affecting market sentiment subsides.”
Zeti said the exchange rate was not an instrument of monetary policy nor a tool to gain competitiveness.
“The (central) bank however stands ready to maintain orderly conditions in the foreign exchange market. More fundamentally, the focus of our policies is to promote macroeconomic stability, a resilient financial system, maintain strong buffers and ensure a long lasting growth that is sustainable. This has been and will continue to be the policy approach that will enable Malaysia to weather such challenging episodes,” she said.
Meanwhile, Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said there was an increasing pressure on the ringgit.
“However, I believe that the international rating agency’s decision on Malaysia’s sovereign rating will be key to the next trend of ringgit vis-a-vis the US dollar although this may just be sentiment driven,” he said.
Zahidi said the overall strength of the US dollar – which includes against the ringgit – was largely associated with the US economy which, despite a lacklustre performance in the first quarter of 2015, would likely continue to strengthen throughout the year.
He noted that based on past experiences, a typical US dollar rally lasts six to seven years, and if this trend continues, US dollar will remain relatively strong across the board for another two to three years.
Zahidi said the performance of ringgit against the US dollar hinged on several factors including the outlook of global crude oil prices, level of the country’s current account surplus, decisions by international rating agencies on Malaysia’s sovereign rating as well as the possible rate hike in the US which will influence the direction of capital flows in this region, Malaysia included.
“As the proportion of foreign holdings of government bonds is relatively high in Malaysia, a reversal in capital flows will naturally affect the ringgit performance against the US dollar. All these factors have capped the upside for the ringgit at this juncture,” he said.
Lee said while the ringgit was expected to stabilise once negative sentiment towards it fades, investors would be focusing on Malaysia’s medium-term growth prospects and also to assess whether the ringgit will continue to provide attractive returns from both a yield and appreciation standpoint in the face of higher US interest rate going forward.
“A two-way capital flows will continue to influence the ringgit, along with the level of economic growth, inflation differential, the current account balance, political and institutional factors,” Lee said.