Malaysia: Ringgit gains ground after sustained decline in 2015
February 18, 2016
The ringgit was Asia’s worst performing currency throughout the latter half of 2015 as a series of events, including political scandals, financial market volatility and collapsing energy prices, all took a toll on the currency. These factors abated somewhat in early 2016 and, by 16 February, the currency had recovered to 4.13 MYR per USD, which was 6.1% stronger on a monthly basis and 3.8% stronger year-to-date. However the ringgit was still 15.3% weaker relative to the corresponding day last year.
The largest overnight gain the ringgit made in the past three months was on 22 January, when it appreciated 1.8% from the previous day’s closing price. The appreciation came as a rally in crude prices was coupled with improved confidence in Chinese equity markets and disappointing indicators from the United States. Oil revenue is a major source of income for Malaysia and any sign that a recovery in prices may be looming boosts investors’ confidence in the ringgit. Indeed, much of the ringgit’s appreciation in recent weeks may be attributable to a stabilization, and modest increases, in energy prices.
January’s rapid recovery indicates that Malaysia’s fundamentals remain strong, and concerns over political instability and the effects of low oil prices may have been overblown. The impact of low commodity prices on the country’s balance of payments has been mitigated by export growth in other sectors and the political situation has stabilized. After undergoing a series of attacks and challenges to his leadership, Prime Minister Najib Razak appears to have a firm grip on power and his United Malays National Organization party is looking more unified that it has been in months. Furthermore, the revised 2016 budget, which was released on 28 January, revised the assumed benchmark oil price downward from USD 48 per barrel to USD 30–35 per barrel while keeping the budget deficit target to 3.1% of GDP. The revised budget signalled to markets that the government is firmly committed to fiscal consolidation, a position that will support the currency going forward.
Although the position of the ringgit has improved, it is difficult to gage its momentum. Movements in oil prices are usually dependent on factors that are difficult to predict. Additionally, after expending significant sums of international reserves in an effort to protect its currency, the Central Bank will need to recapitalize which, as strategists Khoon Goh and Irene Cheung from ANZ point out, could limit the ringgit’s appreciation going forward. They compare Malaysia’s situation with that of Indonesia, stating that:
“We (…) see a limit to how far MYR can rally in the event that oil prices rebound, given the need for BNM to rebuild their FX reserves. Indonesia has boosted their FX reserves in December to USD105.9bn (from USD100.2bn in the previous month) via a global bond issuance. In contrast, Malaysia’s FX reserves have been stable in recent months. But at current levels Malaysia has the lowest reserve adequacy in Emerging Asia.”
The Central Bank has deployed considerable reserves over the course of 2015, in order to smooth the depreciation of the ringgit. Now that the currency appears to have stabilized, the Central Bank should begin to rebuild its foreign exchange reserves. This process will keep a steady supply of the currency in the market, and will likely keep the ringgit from appreciating substantially.
Author: Robert Hill, Economist