Malaysia embattled by jet probe sees ringgit support

Malaysia embattled by jet probe sees ringgit support

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Category: Asean Economic Community

Written by Bloomberg News

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Currency strategists are giving Malaysia a vote of confidence just weeks after the government came under criticism for its handling of a probe into the disappearance of an airliner with 239 people onboard.

A growing number of analysts say steps by Prime Minister Najib Razak to end 16 years of budget deficits will outweigh any short-term negative reaction toward the country, which has suffered an exodus of Chinese tourists since the Malaysian Airline System Bhd. jet bound for Beijing vanished on March 8. The ringgit lost value in five of the past seven weeks even though economic growth is seen expanding this year.

Bank of America Corp. named the ringgit one of its two favorite Asian currencies this month, while Wells Fargo Co. raised its year-end estimate to forecast a 2.5-percent rally to 3.18 per dollar and Société Générale SA predicted a level of 3.15. A measure of purchasing power parity shows it to be the cheapest of nine Asian currencies tracked by Bloomberg.

“Malaysia’s trade balance is expanding and its growth is driven by exports and investment, which will offset any potential decline in tourism after the plane incident,” Albert Leung, a strategist at Bank of America in Hong Kong, said on Tuesday in a phone interview. “The fiscal consolidation story has some incentive for them to have to keep improving.”

Best prospects

Bank of America said in an April 17 note that the ringgit and South Korean won are Asia’s best prospects. While the median forecast in a Bloomberg strategist survey predicts Malaysia’s currency will weaken 1.6 percent by year-end to 3.29 per dollar, that prediction has risen from 3.32 on April 25.

The ringgit is 53 percent undervalued, according to the Economist magazine’s Big Mac index that measures purchasing power parity based on the cost of McDonald’s Corp.’s hamburger in different countries.

The ringgit is the worst performer among developing Asian currencies over the past six months after Thailand’s baht, sliding 3.6 percent versus the greenback, data compiled by Bloomberg show.

Its 7-percent decline last year was its sharpest loss since the Asian crisis of the 1990s and was worsened by the US Federal Reserve cutting its monetary stimulus program, which had the effect of pumping money into the world’s financial markets.

Flight MH370

Malaysia’s currency touched 3.3511 on February 4, the weakest level since May 2010, before starting a rally that has left it 0.5 percent higher since the start of the year. It has risen 0.1 percent in April, following two months of gains.

The government’s handling of the search for Malaysian Airline Flight MH370, the longest for a missing passenger plane in modern aviation history, has shone a spotlight on Southeast Asia’s third-largest economy and opened the government up to criticism. The authorities had faced an “unprecedented” situation and despite initial communication problems, “toward the later part, we got our act together,” Najib told CNN in an interview last week. The government will release a preliminary report this week on the disappearance of the airliner, he said.

Malaysian officials were accused of issuing conflicting statements in the days following the tragedy, and family and friends of the mostly Chinese passengers have protested in front of the nation’s embassy in Beijing.

The number of Chinese tourists traveling to the country has declined since the plane’s disappearance, Malaysian Tourism and Culture Minister Mohamed Nazri Abdul Aziz was quoted as saying in an April 9 report by the official Bernama news agency. Travel and tourism accounted for 16 percent of Malaysia’s gross domestic product (GDP) in 2013.

Fiscal improvement

“I don’t really think the airline incident changes anything,” Steffen Reichold, an emerging-market economist at Stone Harbor Investment Partners Lp., which oversees $63 billion, said in a telephone interview from New York on April 28. “The economy has been performing reasonably well. It’s one of the high-growth currencies.”

Malaysia, whose $305-billion economy is smaller than Taiwan’s $355 billion and larger than Singapore’s $275 billion, has run budget shortfalls every year from 1998.

Concern that the nation’s public finances would worsen prompted Fitch Ratings to cut the outlook on its “A-” credit grade to “negative” from “stable” last July 30. Malaysia could move closer to a rating downgrade if a persistent current-account deficit emerges alongside its fiscal deficit, the New York-based company said in a January 10 report.

There are signs of a rosier picture emerging. Najib’s cuts to fuel subsidies, increased electricity tariffs and plans for a consumption tax have prompted the central bank to predict the fiscal deficit will narrow to 3.5 percent of GDP in 2014, from 3.9 percent last year.

‘Boost sentiment’

“Those are steps in the right direction, which should help boost investor sentiment,” Benoit Anne, the London-based head of emerging-market strategy at Société Générale, said in an April 28 interview. The ringgit “has lagged most of its peers, and with the recovery in risk appetite, the chasing-the-laggards behavior should support it,” he said.

Options traders are the most optimistic about the ringgit in more than a year, according to data compiled by Bloomberg. The premium on three-month contracts giving the right to sell the currency over those allowing for purchases fell to 1.1 percentage point on April 10, the smallest gap since January 2013 and down from as much as 2.55 percentage points in August.

Current account

The surplus in Malaysia’s current account, the broadest measure of trade, widened to 16.2 billion ringgit ($5 billion) in the fourth quarter, from 2.55 billion ringgit in the April to June period last year, which was the smallest excess on record. The trade surplus widened to a two-year high of 10.4 billion ringgit in February, paced by a 12.3-percent jump in exports compared with a year earlier.

Factory output increased 6.7 percent in February, the most since July, while GDP will expand 5.05 percent this year, up from 4.7-percent growth in 2013, according to a Bloomberg survey of economists.

“The improving outlook for Malaysia’s economy and fiscal position, along with a benign global market environment, have been supporting a stronger ringgit,” Eric Viloria, a strategist at Wells Fargo in New York, said on Wednesday by e-mail. “Steady and gradual Fed tapering resulting in orderly US bond market conditions, rather than a sharp rise in yields, is also a key factor in the forecast upgrade.”

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In Photo: Subas Chandran from Malaysia Airlines (center) and Sayid Ruzaimi Syed Aris from Malaysia’s civil aviation department (right) brief the relatives of Chinese passengers onboard the missing Malaysia Airlines MH370 plane at a hotel in Beijing, China, on Tuesday. Malaysian authorities on Tuesday in Beijing played for the first time the audio communications between Flight MH370’s cockpit and air-traffic controllers before the plane disappeared on March 8. (Bloomberg)

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Malaysia embattled by jet probe sees ringgit support