Malaysia: Ringgit depreciates to levels not seen since 1998; currency is Asia's worst performer
August 20, 2015
On 12 August, the Malaysian ringgit weakened to 4.04 MYR per USD, breaching the psychological 4.00 MYR per USD barrier and sending the exchange rate to levels not seen since the Asian financial crisis of the late 1990s. Since 12 August, the ringgit has deteriorated further and on 19 August the exchange rate further deteriorated to 4.11 MYR per USD, 7.8% weaker than the corresponding day in July and 30.0% weaker compared to the same day of the previous year.
The ringgit is suffering from a number of factors, both domestic and from abroad. On the domestic front, political and financial fallout from the 1 Malaysian Development Berhad investment fund (1MDB) scandal has reduced demand for the currency. The fund, which had been set up by the current Malaysian Prime Minister in 2009 has accrued outstanding debt of approximately USD 11 billion and is widely exposed across capital markets. The systemically important fund is reportedly struggling to repay its debts, and to complicate matters further, reports began to emerge in July that the Prime Minister had received money from 1MDB for personal gain. The subsequent investigations, allegations of cover ups, and loss of investor confidence in the fund have put pressure on the ringgit as foreign capital leaves Malaysian markets. External factors such as the anticipated interest rate hike in the U.S. later this year and soft energy prices are helping to keep the ringgit trading at a historically low value.
Despite the climbing exchange rate, the Central Bank has stated that the country would keep markets open and refrain from imposing capital controls in an attempt to halt the currency’s depreciation. The Central Bank has, however, sold off sizeable amounts of its international reserves in order to mitigate the deterioration of the ringgit, currently Asia’s worst performing currency.
Author: Robert Hill, Economist