A Momentary Respite for the Ringgit and Malaysian Stocks as 1MDB remains the No.1 Problem

July 2, 2015

A Momentary Respite for the Ringgit and Malaysian Stocks as 1MDB remains the  No.1 Problem

by Bloomberg @www.themalaysianinsider.com

MalaysiaLooking Great from the Outside but Rotting Inside

A rally in Malaysia’s currency and stocks after the nation avoided a Fitch Ratings downgrade may be short-lived if it doesn’t clean up an indebted state investment company and reduce threats to its current-account surplus.

The ringgit will probably still weaken to 3.8 against the dollar by the end of this year, according to Credit Suisse Group AG and United Overseas Bank Ltd Malaysia would be among the most fragile nation’s in the region should a recovery in the euro area stall because of Greece, Credit Suisse says.

“Continued weakness in the ringgit is perhaps the best barometer of sentiment towards Malaysia and the ringgit continues to hover near its post Asian Financial Crisis peg of 3.80,” Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd, wrote in a note Wednesday.

“Malaysia continues to be caught in changing domestic and external cross-currents.”

Before Wednesday’s market rebound, foreign funds had been cashing out of the Malaysian stock market at the fastest pace in Asia this year, while the ringgit had weakened to the lowest level in a decade.

Investor confidence has been battered by growing scrutiny on Prime Minister Datuk Seri Najib Razak’s management of debt-ridden 1Malaysia Development Bhd (1MDB), as well as faltering export and state revenue after commodity prices slumped.

The challenge is to ease investor concerns quickly enough to prevent an exodus of funds whenever the US Federal Reserve starts to raise interest rates.

‘Adverse developments’

“Foreign investors will likely be uninterested in Malaysia until we see improvements in the negative factors” which include 1MDB and weak corporate earnings growth, said Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management, which oversees about US$112 billion (RM421.58 billion). He spoke a day before Fitch affirmed Malaysia’s credit rating on June 30.

“It’s a maelstrom of adverse developments.” Malaysia has taken steps to pare down 1MDB’s debt of RM42 billion (US$11 billion) as of March 2014 and is winding down the company’s operations through possible sales of land and power assets. The government has explicit guarantees for RM5.8 billion of 1MDB debt, and Fitch said there is a “high probability that sovereign support for 1MDB would be forthcoming if needed”.

“Malaysia will need to better control its off-balance sheet liabilities and improve its governance standards,” Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore, said before the Fitch decision. “Having a public debt ceiling of 55% of GDP is pointless, if the limit is sidestepped with government guarantees and support letters.”

Domestic procurement

Najib chairs 1MDB’s advisory board and has resisted calls from former Prime Minister Tun Dr Mahathir Mohamad to step down as the country’s leader over the debacle.

Keeping the current account in surplus will also be key to boosting confidence in Malaysia, said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp. With Southeast Asia’s third-largest economy running a fiscal deficit starting from 1998, Najib in January tried to pre-empt concerns about the possibility of a current-account gap as well.

He unveiled measures that may keep more money in the country including encouraging government-linked companies to invest domestically and increasing local goods and services in government procurement.

“Investors realising that Malaysia will not go into twin deficits is likely to lead to a recovery in the currency, international reserves and funds flow,” said Gerald Ambrose, who oversees the equivalent of US$3.6 billion as managing director of Aberdeen Asset Management Sdn in Kuala Lumpur.

A possible complication: this year, Indonesian and Malaysian governments and companies have sold more foreign-currency debt than they did in the whole of 2014 as a global bond rout pushes up yields and their currencies weaken. That raises concern it will become costlier for them to service foreign-currency debt as the dollar gains.

The ringgit fell to 3.7887 per dollar Monday, near the 3.8 level the currency was pegged at from 1998 to 2005. It closed 0.7% higher Wednesday after Fitch also raised its outlook on the sovereign to stable from negative.

5 thoughts on “A Momentary Respite for the Ringgit and Malaysian Stocks as 1MDB remains the No.1 Problem

  1. Din,
    Najib will get away with it unless we do it the US’s way. Malott will tell you how

    This is against natrural law that a crook can get away. Nixon didn’t get away even Churchill was sacked after we won the war

  2. For what it’s worth, a majority of SME/Is are suffering serious cash flow problems since the introduction of GST. Why? Not only is there extremely poor implementation, with shifting goal-posts, but also the fact that most have not seen a penny of their input tax returned – while they have studiously banked in their output tax. Sp while customs and the dick head ministers have been boasting about the collection, they have not returned the needful. So can anyone really blame businesses for inflation?

    The Manufacturing indices are also going downhill due to reduced domestic demand and purchasing costs. Not to mention our ever diminishing Savings-Debt ratio, especially when Gomen Agencies like LTH, EPF, KWAP, FGV, MARA and so on, together with a whole host of GLCs’ are used for the singular purpose of rescuing that 1MDB, PFI and other wonderfully acronymed ‘mismanaged’ FUBAR’ed failures.

    Corruption is stratospheric (heck.. almost escape velocity already), as all the rats are ‘squirreling’ their stolen cheese in BVI, Caymans, Zurich, London and in the lil Dot south. So Fitch may have given us a breather while we watch those Dirty-Rotten Scoundrels squirm in mindless ecstasy. The ax will fall soon.

    Anyone wants to buy my BAT shares? How about my 30 yr old merc 123? Spare tyre included.

  3. This statement by Fitch should cause outrage amongst all right-thinking Malaysians:

    Fitch: “local agencies such as Employee Provident Fund (EPF) can provide funding to support to the sovereign in the event of a sell-off by non-residents.”

    Translation: the 1Malaysia regime should use your hard-earned EPF retirement savings to prop up the stock and bond markets if foreigners get nervous and take their capital out.

  4. Another example of neoliberal capitalist ideology (Greece this time):

    According to the IMF-ECB-EU, it is OK to use German tax payer money (and other taxpayer money) to bail out German and French banks, even as the ordinary people of Greece suffer through externally-imposed austerity measures, even after 5 years! In spite of risky and even irresponsible lending to previous corrupt Greek governments and its corrupt officials by these banks in the first place.

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