Malaysia: Ringgit ends winning streak in May
May 20, 2016
The ringgit has had a tumultuous past year as a number of issues, both domestic and external, have impacted the currency. Fallout from the 1MDB crisis, as well as expectations over the start of the Fed’s tightening cycle pushed the Malaysian currency to multi-year lows in late 2015. In late April, the 1MDB scandal returned to the headlines and speculation that the Fed will raise rates again have shaken the Malaysian currency. On 19 May, the ringgit closed at 4.08 MYR per USD, which was 5.0% weaker on a monthly basis and 13.6% compared to the corresponding day last year. However, the currency is in better shape than it was at the beginning of 2016 however, as it is 5.0% stronger year-to-date.
The ringgit is at the mercy of outside pressures, particular stemming from the Fed’s tightening cycle with the next increase projected in the coming months. On 19 May, minutes from the Fed’s April meeting revealed that an upcoming rate hike in June was likely. 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 saw the three days of declines prior to 19 May weighing on sentiment for the ringgit. The ringgit has also had to contend with weak trade data from the first quarter, which showed Malaysia’s current account surplus falling to its lowest level in over three year.
Malaysia’s struggle with the troubled 1MDB investment fund may be coming to an end, but the impact of the mismanaged fund on the currency is still apparent. Last month, 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 and revived calls for investigation and closure of the fund. The Malaysian government is the sole shareholder of 1MDB, and yields on Malaysian debt increased as a result of the default. The resulting impact on investor confidence has been one of the factors weighing on the ringgit.
Although the aforementioned factors have weighed on the ringgit in recent months, their effects will likely be transitory and the ringgit should recover. The Fed’s policy meeting minutes will not have a lasting impact and oil should continue its broad upwards trend. Furthermore, financial instability stemming from the 1MDB fiasco will be contained, thanks to damage control undertaken by the Ministry of Finance. The Ministry of Finance stated that it would dissolve 1MDB’s board of directors by the end of the month and remove legislation that gives the Prime Minister power over the fund’s investment decisions. Political pressures have also abated, as state elections in Sarawak gave the embattled Prime Minister renewed confidence.
Author: Robert Hill, Economist