Grim outlook for ringgit as govt bites the bullet

Innes says credit rating downgrades are not the death knell, but will have significant short-term impacts


The ringgit is expected to maintain its defensive play in the weeks ahead on the back of a strengthening US dollar and the threat of a Malaysian sovereign credit downgrade post-budget.

On Monday, the ringgit was at 4.1768 against the US dollar, paring gains from the 4.1587 achieved last Friday.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the ringgit could weaken at a faster pace with the deficit target at the higher end of market expectations.

He expects the ringgit to trade at 4.20 against the US dollar by year-end, and at 4.30 by the end of next year if fiscal improvements do not occur in 2019.

“Credit rating downgrades are not the death knell, but will have significant short-term impacts and that threat alone will keep the ringgit trading defensively in the weeks ahead. My outlook is now worse for the ringgit,” he told The Malaysian Reserve in an email recently.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said while rating agencies are “somewhat pessimistic” on the deficit target, Budget 2019 offered clarity on the new
government’s policy direction.

“Resources are being used optimally. Higher dividends from Petroliam Nasional Bhd and other government-linked companies would help mitigate the loss of revenue from the Goods and Services Tax and the one-off payment of tax refund.

“The airport real estate investment trust is seen to be an innovative means to raise funds that would minimise development expenditure to a large extent.

“The B40 (bottom 40%) income group continues to receive attention from the government, albeit more targeted now.

“At the moment, the current support and resistance level stand at 4.15 and 4.24 respectively.

“In view of the external uncertainty, the ringgit could hover around that level (by year-end),” he said.

Meanwhile, FXTM global head of currency strategy and market research Jameel Ahmad said the ringgit’s movement was not idiosyncratic to Malaysia and was consistent with the performance of other emerging-market (EM) currencies.

“The rally in the ringgit last Friday was not a consequence of investors reacting to the Malaysian budget announcement, but a correlation of financial markets globally reacting positively to optimism over a comment from US President Donald Trump indicating that there could be a breakthrough with US-China trade talks,” he said.

Jameel noted that the dollar continues to be very strong on a historical level, which is going to present challenges and a weakness for all EM currencies.

“If the US dollar does remain as strong as it is now and external uncertainties globally continue to make investors hesitant to invest in EMs, the ringgit is at a threat to concluding 2018 closer to 4.20 against the greenback,” he said.

Most Asian currencies weakened on Monday after robust US labour data signalled faster interest-rate hikes in the US, while a slowdown in China’s service sector further sapped sentiment, according to Reuters.