by Y-Sing Liau
Bloomberg
October 2, 2015

The ringgit fell and stocks retreated as concern Malaysia may miss its target of balancing the budget by 2020 hurt a currency already reeling from a worsening slowdown in China and allegations of corruption against Prime Minister Najib Razak.

The fiscal shortfall may be “in the region” of 1 percent of gross domestic product at the end of the decade, compared with a current deficit of 3.2 percent, the New Straits Times reported Thursday, citing comments by Najib to fund managers and investors in New York. Malaysia derives 22 percent of government revenue from oil-related sources and its finances have been sapped by a 49 percent drop in Brent crude over the past 12 months.

The ringgit fell as much as 1.2 percent before closing 0.3 percent down at 4.4152 a dollar in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. It’s dropped 21 percent so far in 2015, trailing only the Brazilian real, Turkish lira and Colombian peso among 24 emerging markets tracked by Bloomberg amid a deepening slowdown in China and the prospect of higher U.S. interest rates.

“The ringgit seems to continue to be Asia’s underperformer,” said Mitul Kotecha, head of foreign-exchange and rates strategy for Asia at Barclays Plc in Singapore. “There are generalized factors which have been China, the Federal Reserve and slowing growth. If there are concerns about the budget balancing, that clearly could be an issue as well.”

Political Situation

Reports last month in the Wall Street Journal and New York Times over alleged money laundering and overseas property purchases relating to state-owned investment company 1Malaysia Development Bhd. and Prime Minister Najib Razak have further weighed on sentiment toward Malaysia.

Investors in the U.S. shouldn’t be concerned with the political situation in Malaysia as there is “stability,” Najib was cited by the New Straits Times as saying. 1MDB will sort out its financial issues before year-end and is expected to further reduce its debt by 16 billion ringgit ($3.6 billion) very soon, Najib said, without elaborating. The country also remains committed to achieving a balanced budget by 2020, he said.

The benchmark FTSE Bursa Malaysia KLCI Index of stocks retreated 0.3 percent on Friday, after two days of gains. The gauge has fallen 7.5 percent this year as foreign funds pulled $4 billion from Malaysian shares. The yield on five-year sovereign bonds declined two basis points to 3.77 percent on Friday and is down 10 basis points this week, according to prices from Bursa Malaysia.