Malaysia - Exchange Rate Policy - Nov 10 2011


Ave-11 Ave-12
MYR/US$ 3.1200
3.1100 3.1800
MYR/EUR 4.2714
4.4500 4.3800
Overnight Policy Rate (%) 3.00
3.00 3.00
Source: BMI, November 10 2011

Short-Term Outlook

We see increasing risks that the Malaysian ringgit could experience further selling pressures over the coming weeks due to resurfacing troubles in the eurozone. Following a sell-off across regional currencies in September, the Malaysian ringgit depreciated by around 7.5% before finding support at MYR3.2048/US$. Further negative developments in the eurozone could see the ringgit retesting its recent low of MYR3.2048. A break below this level would present significant downside risks to our year-end target of MYR3.1500/US$ for the currency.
External Headwinds Remain
Malaysia - Malaysian Ringgit Spot, MYR/US$
Source: Bloomberg, BMI

Core View

Global economic headwinds, including the sovereign debt crisis in the eurozone and growing concerns of a hard-landing in China, should spell further weakness for risk-on currencies including the Malaysian ringgit over the coming months. However, despite these downside risks to the Malaysian ringgit's outlook in the short term, we expect the country's robust current account dynamics to provide support for a steady appreciation in the currency over the medium term. Furthermore, a positive economic outlook should underpin strong foreign direct investment (FDI) inflows and fuel demand for the ringgit over the coming quarters. Nonetheless, we expect further weakness in the currency in H112 before the ringgit resumes its bullish uptrend in H212. This means that the ringgit should average at around MYR3.1800/US$ in 2012 before strengthening to MYR2.8500/US$ by end-2013.

Despite cooling external demand, Malaysian exports have remained resilient in recent months. Trade exports grew 10.8% year-on-year (y-o-y) in August (up from 6.9% y-o-y in July) while outpacing that of imports at 6.8%, resulting in a healthy trade surplus of US$3.7bn. Although we expect the trade balance to narrow over the coming months, a surplus would nonetheless be positive for the ringgit. Meanwhile, FDI inflows are likely to remain strong in 2011 due to a positive response from foreign investors towards the government's ambitious Economic Transformation Plan (ETP). In fact, we have already seen compelling evidence that investor optimism over the ETP has been a key factor behind the surge in capital inflows into Malaysia in 2011. According to a survey conducted by the International Trade and Industry Ministry, local and foreign private sector companies are expected to commit MYR50.6bn (US$16.8) worth of investments in 2011. We are optimistic that these FDI inflows should provide further support for the currency over the coming quarters.

Strong Cushion Of Reserves
Malaysia - Foreign Reserves, US$mn
Source: Bloomberg, BMI
According to figures published by Bank Negara Malaysia (BNM), the recent wave of selling pressure in the foreign exchange market drained the country's foreign reserves by 4.1% from US$134.5bn in August to US$129.1bn by the end of September. However, it is worth noting that the central bank's intervention in the foreign exchange market is largely aimed at limiting short-term volatility in the exchange rate, rather than an attempt to defend against a balance of payments deficit. As the accompanying chart shows, despite the central bank's intervention, the country's foreign reserves remain above its pre-crisis peak. Our view that Malaysia's trade balance will remain in surplus while FDI inflows will continue to grow over the coming quarters means that we should see a continued accumulation of reserves.

We note that movements in the Malaysian ringgit and the Chinese yuan are highly correlated as a result of BNM's conscious efforts to keep Malaysian exports competitive. Given that we expect external demand to remain relatively subdued in 2012, export growth should continue to slow over the coming months. This poses a risk that the BNM may seek to limit any significant gains for the ringgit in order to prop up exports.

Catching Up With The Yuan ?
Asia - Spot MYR/US$ (LHS) & 12-Month CNY/USD NDF outright (RHS)
Source: Bloomberg, BMI

Risk To Outlook

FDI inflows will play a major role in sustaining a steady appreciation in the Malaysian ringgit over the coming quarters. To a great extent, this is heavily dependent on the successful implementation of the government's ETP. We warn that Malaysia's deteriorating fiscal position, which we expect to amount to a deficit of 5.6% of GDP in 2012, represents a significant risk to the government's ability to implement the ETP. Should investor sentiment start to wane on the back of growing concerns that the government could face difficulties in financing the ETP, a slowdown in FDI inflows would mean that the currency could see limited gains in H212.


Posted by Mr Thx Wednesday, April 11, 2012


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