By ANJANI TRIVEDI
Wall Street Journal
Aug. 7, 2015
Malaysia’s ringgit is plumbing new lows and foreign-exchange reserves are dwindling
Malaysia’s tumbling ringgit, heading toward its weakest level in two decades, is highlighting the mounting pressure its central bank faces to stem the slide.
The currency has reset its 17-year trough for five consecutive days this week, losing 2.8% of its value in that period. It last traded at 3.9280 against the U.S. dollar Friday.
After weeks of pouring foreign-exchange reserves into currency markets to prop up the currency, the central bank’s pool of resources is dwindling. Foreign exchange reserves have fallen by almost $15 billion over the last six months and a half months, with the ringgit down 12.2% for the year so far. The pace of deterioration of Malaysia’s foreign reserves is unsustainable, analysts say.
Foreign-exchange reserves data for the two weeks ended July 31, due later Friday, likely will show the degree of the central bank’s worries.
Escalating rhetoric hasn’t worked either: The central bank frequently tells traders and dealers to avoid speculative trades that would put pressure on the ringgit.
The rapidly falling ringgit has been a lucrative bet for currency traders since its decline began last month. A notional bet of $10 million that the ringgit would weaken over a month placed in July would have earned close to $300,000.
Between July 7 and July 27, Malaysia’s ringgit hovered at a level close to its decade-old peg, with traders citing the central bank selling U.S. dollars and buying the ringgit to support the currency around 3.80. As it withdrew support, this week the currency fell sharply, hitting fresh lows on each day as market pressure mounted.
Malaysia’s ringgit has reset its 17-year trough for five consecutive days this week. ENLARGE
Malaysia’s ringgit has reset its 17-year trough for five consecutive days this week. PHOTO: GETTY IMAGES
“Although recent efforts by [Bank Negara Malaysia] have helped to smooth spot movements, the pressure on the currency is evident in [foreign exchange] forwards,” analysts from Barclays wrote in a note Thursday.
Forwards contracts, a gauge of future expected value of the currency, suggest investors remain wary of further depreciation, and of potential moves by the central bank to tighten monetary conditions and stabilize its rapidly declining currency. Such moves could also act to throw out speculators in its currency.
Central banks in emerging markets like Malaysia built up their war chests in the aftermath of the Asian financial crisis to defend their currencies and buffer them from capital outflows. In recent months, many of those currencies have tumbled amid the increasing likelihood the Federal Reserve will raise interest rates and a stronger U.S. dollar. Declining reserves raise risks for the ability of emerging-market economies to ride out financial turmoil.
To be sure, intervening in markets doesn’t always work. Steps by Asian central banks to support their exchange rates can encourage further speculative activity, a recent study by the Bank of International Settlements found.
For Malaysia, the struggles with its sinking currency are reminiscent of the Asian financial crisis of 1997-1998, when Prime Minister Mahathir Mohammed announced sweeping capital controls on the ringgit, including an end to trading the currency and pegging it to 3.80 against the U.S. dollar. Mr. Mahathir even blamed financier George Soros for making large speculative bets on the ringgit and exacerbating the fall. At the time, the sharpest fall in Malaysia’s currency and stock markets came after Mr. Mahathir imposed restrictions.
While a stronger dollar and the prospects of higher U.S. interest rates have pressured other emerging-market currencies recently, Malaysia has its own set of troubles, too. Heightened worries about political instability amid an investigation into the country’s debt-laden state investment fund and cratering oil prices, which threaten oil-linked revenues, have added to pressure.
Still, the central bank maintains that the currency is falling faster than warranted. In written comments to The Wall Street Journal on June 9, Malaysia’s central bank Gov. Zeti Akhtar Aziz said, “the ringgit is now trading at levels that are not reflective of the fundamentals of the Malaysian economy.” At that point, the currency closed in toward 3.80, falling to its weakest in almost a decade.
Gov. Zeti said the ringgit last traded at these levels during the Asian financial crisis, “when Malaysia was experiencing a major recession, when our reserve levels were low, when financial markets had plummeted” along with distressed financial institutions and a current account in deficit. She added that the economic situation is markedly different now and “none of these extreme conditions are prevailing today.”
Gov. Zeti also noted that the country’s foreign-exchange reserves remain significant and the current account remains in surplus.
For months, the southeast Asian nation’s bond market, almost half of which is held by foreign investors, had been relatively resilient. While some investors pulled out of short-term bonds, many held on to their longer-term bonds, reflecting confidence that Malaysia’s current bout of turbulence would be short-lived. But investor sentiment has shown signs of nervousness over the past week. Yields, which move inversely to prices, have surged 0.238 percentage points to 3.74% on five-year bonds.
Traders say speculative activity against emerging-market currencies has broadly risen, with the Brazilian real, Turkish Lira and South African rand hovering at multiyear lows against the dollar. They expect such trading to continue for the near-term.
Write to Anjani Trivedi at [email protected]