Malaysia: Sharp depreciation in ringgit halted by government intervention
October 15, 2015
On 29 September, the Malaysian ringgit peaked at 4.46 MYR per USD. The currency has been in a tailspin since late summer after a number of domestic and external factors conflated to shake investors’ confidence in Malaysian assets, making the ringgit one of the world’s worst-performing currencies. On 29 September, the ringgit had weakened 6.3% from 28 August, and 36.0% from the corresponding day last year. The ringgit has decline 27.5% against the USD since the start of the year. Since 29 September, however, the currency has appreciated 6.2% on the back government-led intervention in the stock market and a temporary rally in oil prices.
The ringgit has been attacked on a number of fronts. Weak demand for Malaysian exports, particularly oil products and natural gas, which make up nearly a quarter of total exports, has persisted since oil prices collapsed last year. The ringgit is closely linked to the price of Brent crude, and mirrors volatility in oil prices in to a large extent. This decline has had a moderate impact compared to the drastic effect of the current confidence crisis that has gripped investors. Since the 1MDB scandal unfolded in July, investor sentiment has deteriorated and the currency has suffered along with it. Controversy over allegations concerning Prime Minister Najib Razak’s connections to the misappropriation of funds from the struggling state-owned investment fund (1MDB) have fanned political uncertainty as well, and calls for the Prime Minister’s resignation have grown, even from within his own party. Investor confidence in Malaysia was further dampened as uncertainties over the future path of the Fed’s impending rake hike helped to keep the ringgit trading at historically-low levels.
The ringgit has appreciated somewhat since peaking on 29 September as the government has pledged support for the fledging stock market. On 16 September, Najib announced that the government would inject USD 4.6 billion into the Malaysian stock market via state-owned investment funds in an effort to restore investor confidence and halt the currency deterioration. Expectations over the inflow of this money into the stock market over the course of October has helped stabilize the currency and precipitated some bullish sentiments in FX markets.
Author: Robert Hill, Economist