September 16, 2016
The ringgit has had a tumultuous week as a combination of factors, both domestic and external, have impacted the currency. The fallout from the 1MDB crisis and expectations over the resumption of the Fed’s tightening cycle weighed on the Malaysian currency, which fell to a low last seen in early June. On 15 September, the ringgit closed at 4.14 MYR per USD, which was 3.2% weaker on a monthly basis. However, the currency is still in better shape than it was at the beginning of 2016 since it is 3.6% stronger on a year-to-date basis.
The ringgit remains vulnerable to outside pressures, stemming in particular from a potential Fed interest rate hike. Although the FOMC did not give a clear hint of the timing of the next rate hike, the positive tone of their July statement suggested that the U.S. monetary authorities see economic conditions becoming favorable for a rate increase before the end of the year. Increased expectations of a rate hike works against the MYR as financial markets begin pricing in a stronger USD. Malaysia’s economy is also strongly linked to oil prices, which declined significantly recently from USD 49.5 on 8 September to USD 46.3 on 16 September, weighing on sentiment for the Malaysian currency. The MYR has also had to contend with weak trade data from July, which showed Malaysia’s trade balance surplus falling to its lowest level since August 2015.
Malaysia’s struggle with the scandal-plagued 1MDB investment fund may be coming to an end, but the impact of the mismanaged fund on the ringgit persists. In April, 1MDB entered into default after it missed a payment on a bond amid a dispute with an Abu Dhabi-based investment fund. This triggered a series of cross defaults, which prompted the Abu Dhabi fund to file a claim in June with an arbitration court based in London. The Malaysian government is the sole shareholder of 1MDB, and yields on Malaysian debt increased as a result of the ongoing battle over the USD 6.5 billion claim. The resulting impact on investor confidence has been one of the factors weighing on the ringgit.
Despite these issues, the ringgit could quickly recover if oil prices pick up again and the 1MDB fiasco is resolved soon.
Author: Luis Lopez Vivas, Economist