More foreign outflow risks M’sian capital markets amid rising US-Iran tensions


Escalating tensions between the US and Iran are placing Malaysian capital markets at risk of further foreign outflows as mounting global uncertainties outweigh the immediate benefits of higher oil prices.

Iran has threatened to back out of a 2015 nuclear deal shortly after US waivers on the former’s oil exports expired earlier this month, and meeting with a fresh round of US sanctions.

The developments could see Iranian oil exports falling from 1.2 million barrels per day (bpd) to only 700,000 bpd, an immediate boon to oil prices, but fraught US-Iran relations are adding to the turmoil of external risks facing the global markets.

Emerging markets are particularly vulnerable during heightened uncertainty, OANDA Corp senior market analyst for Asia Pacific Jeffrey Halley said, adding that Malaysia is at risk from funds flocking to safe-haven over risk-based assets.

“(Deteriorating risk appetite) would certainly be a factor, and would outweigh any benefits Malaysia would receive from higher oil prices,” he told The Malaysian Reserve.

“An escalating trade war and problems in the Middle East would weigh heavily on Malaysia and other developing markets in the region.”

Malaysia’s benchmark FTSE Bursa Malaysia KLCI continued to be dragged lower on foreign net outflow, which stood at RM2.76 billion for the first four months of 2019.

Bonds worth billions of ringgit are also at outflow risk if Malaysian bonds are dropped from the  FTSE Russell global benchmark index and Norway’s sovereign wealth fund exits Malaysia’s fixed-income market.

Deteriorating US-Iran relations have been added to the cauldron of external risks threatening to boil over, while continued domestic uncertainty on the policy front is creating an unprofitable situation for the Malaysian capital markets.

The immediate disruption to Iranian oil exports should push crude oil prices higher in the near term, benefitting Malaysia as a net exporter of oil, but global growth concerns will keep any tentative rally in check.

Halley said any supply shortfall can be easily met by the OPEC and its allies (OPEC+), but geopolitical disruptions could have a bearing over the long-term dynamics of the oil market.

“There is still plenty of capacity in OPEC+ and the US, particularly Saudi Arabia and Russia, so a lack of supplies isn’t the issue,” he said.

“Disruption of supplies due to geopolitics would be (the issues), but despite Iran’s sabre-rattling, there is no concrete evidence they intend to (make good on their threats).”

The bigger issue facing oil markets is the re-escalation of the US-China trade tensions as increased US tariffs on US$200 billion (RM832 billion) worth of Chinese goods have put major global trade flows at risk again.

“Oil continues to doggedly hold on to some of its hard-won gains of last month, but a trade talk failure would be the straw that breaks the camel’s back, for obvious reasons,” Halley said.

“Like equities, oil will see outsized price reactions — up or down — to trade talk headlines, both good and bad.”

Plummeting oil prices is not only bad for the Malaysian government, which stands to gain RM300 million in revenue for every US$1 rise above its budgeted Brent crude oil price of US$70 per barrel, but for the ringgit as well.

The commodity-linked currency is positively correlated to crude oil prices and the Chinese yuan — both at threat from the US-China trade war.

SPI Asset Management managing partner and head of trading Stephen Innes said the ringgit is susceptible to the yuan’s weakness due to its responsiveness to the renminbi complex and Malaysia’s concentration of domestic exports to China.

“Given the ringgit’s historical sensitivity to yuan weakness, the US dollar-to-ringgit exchange could move above RM4.20 in a heartbeat if the worst-case scenario unfolds,” he said in a research note last week.

The ringgit continued to lose ground against the greenback for the seventh consecutive week, depreciating approximately 2.2% from March 21 until last week, while Brent crude oil took a breather from its four-month rally to trade above US$70 per barrel.

The prospects of the US and Iran initiating military action against the other would also prove a bane to the ringgit as wartime is typically a period of US dollar strength due to the currency’s safe-haven status.

Continued pressure from the US on Iran’s military and clerical leaders saw Iranian President Hassan Rouhani announce plans to accumulate nuclear material.

While not directly contravening the 2015 nuclear deal, it is perceived as a step back from ending the arrangement which pegs back Iran’s nuclear capacity for at least 15 years.