Fiscal deficit and spending in Budget 2020 to influence currency traders

There are high hopes Putrajaya will play a more active role in the domestic economy next year, says analyst


MALAYSIA’S fiscal deficit and development expenditure planned in the Budget 2020 are the factors the currency market will digest to determine the movement of the ringgit against other currencies.

This week sees the government table its Budget 2020 on Friday, while Chinese and American trade representative meet for trade talks tomorrow amid the spectre of slowing economic growth.

Deteriorating growth prospects are prompting the need for fiscal injection and there are high hopes Putrajaya will play a more active role in the domestic economy next year, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid (picture) said.

As a trading nation exposed to the external environment, the local economy faces challenging growth prospects in 2020 due to the negative impacts from the ongoing US-China trade war.

“The size of the fiscal deficit, development expenditure and infrastructure projects that will be announced are some of the key elements traders want to see”, Mohd Afzanizam told The Malaysian Reserve (TMR).

“The construction sector would be an immediate beneficiary, alongside domestic-oriented industries, as the government would be focusing on rejuvenating the domestic economy.”

Year-to-date, the ringgit is down 1.42% against the greenback at 4.1920. Expectations are that the Budget 2020 will be an expansionary budget. Any fiscal stimulus, however, will have to be balanced against the country’s current finances, as the administration wrestles with over RM1 trillion in debts.

While Malaysia is still expected to hit its 3.4% fiscal deficit target this year, it could struggle to meet its target of 3% in 2020 due to US-China trade uncertainties, Finance Minister Lim Guan Eng was quoted as saying.

The ongoing trade talks between Washington and Beijing will continue to affect market sentiment, Mohd Afzanizam said.

Consequently, equity investors will continue to trade cautiously in the immediate-term.

AxiTrader Asia Pacific market strategist Stephen Innes said the negative economic conditions now need for governments to adopt expansionary policies.

“I think most governments will need to ramp up some level of fiscal stimulus as even lower interest rates globally are not really doing the trick of encouraging CEOs to spend,” he told TMR.

He said developments on the US-China trade front will be a more important consideration than the Budget 2020 to provide leads to the foreign exchange market.

“If we get a trade war ceasefire, an indefinite deferral of the next round of tariffs and a walk-down of the last round of tariffs, this will be very positive (for currency markets).”

Representatives from Washington and Beijing will commence high-level talks tomorrow ahead of impending trade tariffs to be imposed on billions of dollars’ worth of goods.

Hopes of an interim trade deal or concessions being agreed to during the talks appear slim after the US moved to blacklist 28 Chinese firms due to Beijing’s treatment of the Uighur Muslim minority in Xinjiang.

The protracted trade war has, however, begun to detrimentally affect the US and Chinese economies.

It’s been a year marked by high volatility for the ringgit, which rallied 1.7% against the US dollar to close at 4.061 on March 21 before depreciating 3.3% to 4.194 on May 29.

The local note then strengthened to 4.1085 on July 15, only to hit a year-high of 4.2203 against the dollar on Sept 3.

It traded between 4.1875 and 4.1945 in the first half of the trading day yesterday.