PETALING JAYA: In the face of weakening oil prices, the ringgit could face some weakness in the short term before picking up to the RM4.30 to RM4.35 level against the greenback by year end.
This strengthening will be buoyed by a combination of inflows into the bond market and Malaysia’s ability to stick to the fiscal deficit figure of 4.5%, say analysts and economists.
Malaysia is reliant on oil revenue and the risk to the ringgit stems from the government’s estimate in Budget 2020 that the Brent oil price would be at US$62 per barrel.
For every US$1 per barrel drop in the oil price, oil revenue will be reduced by RM300mil. The latest forecast is between US$25 and US$35 a barrel.
With oil prices weakening to US$20–US$25 per barrel, it could increase Malaysia’s revenue loss by RM11.1bil–RM12.6bil, and thus further weaken the ringgit.
UOB Bank has a house view target of RM4.50 for the ringgit in the short term, and RM4.30 by year end.
UOB KayHian Malaysia Research head Vincent Khoo agrees and sees the ringgit weakening to the RM4.50 level over the short term, and this is partly reflective of the country’s export receipts which are significantly derived from oil and palm oil.
Lower oil prices mean less revenue for the country, and hence, a weaker ringgit.
The good news is that Khoo is expecting the ringgit to strengthen to the RM4.30 level by year end, particularly if Malaysia’s fiscal deficit level can be maintained at 4.5%.
“The ringgit is more dependent on local conditions.
“It will likely weaken in the short term because of the knee-jerk sentiment, but should recover by the mid term, ” said Alliance Bank chief economist Manokaran Mottain.
His projections are for the ringgit to hit the RM4.30 to RM4.35 mark by year end.
Manokaran said the ringgit used to track oil very closely, but in recent weeks, this has no longer been the case.
He added that another factor providing some stability for the ringgit is the foreign fund flow into the bond market.
“There is some carry trade happening there and the foreign fund managers are taking advantage of the interest rates here, ” he said.
Thus, because of the influence of the bond market, Manokaran expects the ringgit to be relatively stable.
The ringgit opened the day marginally lower at RM4.3780/3880 against the US dollar. This was marginally lower from RM4.3700/3770 at Monday’s close.
It subsequently settled at the RM4.3886 level as at press time.
The ringgit was at the RM4.09051 level in the beginning of the year. However, a triple whammy of oil prices crashing, the Covid-19 pandemic and local politics has sent the local currency down some 7.3%.
Oil has been having a terrible 2020 so far, and for now its troubles do not appear to be over.Malaysia’s fortunes are tied to the Brent crude oil, and not the West Texas Intermediate (WTI) crude oil.
As at press time, Brent oil was down 3.18% to US$25.30.
This is one of its lowest levels since 2002.
Year to date, it is down some 62% from the US$66 level in the beginning of the year.
When Bank Negara released its annual report on April 3, it showed that the ringgit liquidity placed with the central bank fell by RM4.9bil to RM156bil in March from February’s RM160.9bil.
On a year-to-date basis, surplus liquidity fell by RM12.9bil compared with a full-year decrease of RM16.1bil in 2019.
In a report on that same day, Maybank Investment Bank Research highlighted that the decline shouldn’t be seen as a cause for alarm, as the amount of liquidity remained sufficient in its view.
“Surplus liquidity serves as a buffer, consisting largely of overnight money market placements which Bank Negara accumulated through its daily cash sweep in the banking system.
“Because of the excess liquidity position, this probably explains why Bank Negara doesn’t usually need to conduct large cash injections into the market through open market operations, like what the People’s Bank of China does, ” it said.
Maybank IB Research added that the amount of foreign holdings with low stickiness in local bonds has likely reduced, following Bank Negara’s enforcement of a ban on offshore ringgit non-deliverable forward market trading in November 2016, thus reducing the vulnerabilities.