By John Manning – john.manning@internationalbanker.com
In August, the Malaysian ringgit dropped to an all-time low against the dollar of neighbouring Singapore, while a further slide in subsequent weeks led to the currency in late September hitting an 18-year low against the US dollar.
US Dollar / Malaysian Ringgit (Source: OTC Interbank | Trading Economics)
The ringgit has been among the world’s weakest performers over the last 12 months or so, having consistently shed its value since September 2014. In the first nine months of 2015 alone, the ringgit dropped by 28 percent against the US dollar, and when it closed at 4.47 on September 29, it marked its weakest performance against the greenback since Asia’s economic crisis of 1997, when at one point the dollar fetched RM4.88.
As a heavy exporter of oil, the ringgit has been damaged by the collapse in the global price of the commodity. Oil’s slide has put a heavy degree of pressure on the finances of the Malaysian government, which normally earns around 22 percent of its total revenue from oil-related activities. While the price of oil has not dropped as dramatically is it did during the second half of 2014, a steady decline has still occurred throughout this year; indeed, by early September, Brent crude had halved in price over the course of the previous 12 months.
Another pivotal issue that has sent the ringgit crashing has been the release of data showing that Malaysia’s reserves of forex had fallen substantially during the year. Forex reserves had plunged by 28.3 percent during the 12 months to the end of August 2015—the biggest yearly drop since 2009, and with total reserves also dipping below $100 billion, the total remaining amount was the lowest since 2010. Such significant falls all but confirm that Malaysia’s central bank has been intervening in the forex markets in order to stop the ringgit’s slide, but evidently to no avail. The mere fact that Malaysia now has lower reserves suggests that its ability to shore up the currency, should it continue to fall to critical levels, continues to diminish.
While such economic factors have played a massive role in causing the ringgit to plummet, especially earlier in the year, analysts have also attributed its weakness to political factors, especially from the third quarter onwards, with many labelling Malaysia’s ongoing government scandal as the worst in the country’s political history. For several months now the 1Malaysia Development Berhad (1MDB) fund has been facing the scrutiny of official investigations conducted by no less than six countries. The wholly government-owned organisation was established in 2008 to promote development in Malaysia, with the ultimate aim of transforming the country into an economic and commercial powerhouse in the region. In recent years, however, the fund has come under intense pressure, initially because it missed an important $11-billion payment to its creditors, and then after further investigations found that hundreds of millions of dollars had been siphoned off from the fund under conspicuous circumstances.
Most significantly of all, however, was the uncovering of a paper trail in July that revealed that $700 million allegedly flowed from the fund straight into the account of Malaysia’s Prime Minister Najib Razak, who in 2009 had made himself chairman of 1MDB’s advisory board. The ensuing weeks saw a number of political moves within Malaysia’s government, with a wholesale cabinet reshuffle being chief among them, as Najib removed several ministers who had been critical about his role at 1MDB. On August 17, the ringgit plunged to a 17-year low against the US dollar, as investors showed heightened concern over the turmoil surrounding Najib, which was also exacerbated by subdued crude prices during the period.
Switzerland has opened its own criminal investigation related to 1MDB on the basis of suspicion of corruption among public officials. After the US Federal Bureau of Investigation began a probe in the final week of September into possible money laundering, and fresh allegations over irregularities in real estate deals involving Najib’s stepson surfaced, the ringgit posted its heaviest weekly loss since 1998, when Asia’s financial crisis prompted the Malaysian central bank to impose capital controls on the currency.
The scandal itself has dragged the ringgit down heavily, while also triggering a wave of political unrest in Malaysia along socio-economic and ethnic lines, given that the government has received widespread support from Ethnic Malays, while ethnic-Chinese communities have largely called for Najib’s resignation. Such political tensions will play their parts in keeping potential investment away from the country while the 1MDB investigations remain ongoing; both Singapore and Switzerland, for example, have suspended bank accounts tied to 1MDB. While the extent of the scandal’s effect on the ringgit is difficult to exactly quantify at present, the likelihood of credit-rating downgrades from Fitch, Moody’s, et al., is increasing every day, and if administered will in turn provide some clarity as to how much lower the ringgit can be expected to go.
October thus far has seen a small reversal of the ringgit’s slide, with the currency having recovered by 7 percent, mainly on the back of a surge in crude prices. In terms of the long-term outlook for the battered currency, however, the prospect of an increase in interest rates by the US Federal Reserve in the near future is keeping many emerging markets—including Malaysia’s—on their toes, as further capital is expected to flow out of such economies and back into the US. The expected rate hike, coupled with China’s ongoing economic slowdown, means that the overall demand for ringgits in the coming months is not expected to recover significantly, while the moderately unstable political situation is also likely to keep investors at bay for some time, and low oil prices continue to constrain government revenue. Ultimately, any meaningful recovery in the ringgit does not appear to be on the horizon any time soon.