August 4, 2015
Malaysia: MIER Economist warns of credit rating downgrade due to dwindling forex reserves
by Ida Lim@www.themalayonline.com.
MIER Economist Dr.Zakariah A Rashild
Ratings agencies may revise downwards Malaysia’s ratings if Bank Negara Malaysia continues to dig into the country’s dwindling foreign reserves to prop up the falling ringgit value, economist Prof Zakariah Abdul Rashid cautioned today.
Zakariah noted that the country’s foreign reserves had fallen from US$ 140 billion (RM541.24 billion) in the first quarter of 2013 to US$100.5 billion by July 15 this year, while the ringgit’s external value had dropped from around 3.2 to the US dollar in 2013 to around 3.8.
He pointed out that Malaysia’s level of foreign reserves is one of the indicators of the country’s economic health, along with other indicators such as the government’s debt levels. “So reserves is like our deficit, if our reserves drop, ratings agencies will downgrade our ratings level. We are in a dilemma, what should we do?,” Zakariah, who heads think-tank Malaysian Institute of Economic Research (MIER), told reporters here when outlining the possible negative effects of propping up the ringgit using Malaysia’s foreign reserves.
Zakariah said he had read an analyst’s comments that the dipping of Malaysia’s foreign reserves below the US$100 billion mark would trigger a ratings downgrade, but added that it remains to be seen what ratings agencies would do. He said ratings agencies do not merely evaluate a country’s ratings based on the levels of its foreign reserves.
Zakariah said Malaysia needs a high level of foreign reserves which would enable currency intervention as the country uses a “managed floating regime” for the ringgit, instead of letting it float fully.Malaysia should not be “complacent” even if its retained import figure is still good, Zakariah said, referring to the 7.9 months’ worth of imports that the country can make with its foreign reserves level of US$100 billion.
The country is also at a “critical” level and has to take care to ensure the ratio of its reserves to short-term external debt does not fall below the current 1.1 ratio. Today, Zakariah also highlighted that the ringit’s value remains unstable despite the huge sum of foreign reserves spent by Bank Negara Malaysia to intervene and defend the country’s currency.
“Should we do so (intervene) or if we should do so, how much are we prepared to spend?” he asked, reiterating his questions on the cost-benefit analysis of ringgit propping and whether or not it is a worthwhile measure.
Last Thursday, news agency Reuters reported that Malaysia’s reserves fell by US$5 billion in the two weeks to July 5 as the central bank moved to shore up the ringgit to keep it at levels around 3.8 to the US dollar, amid a financial scandal involving the debt-ridden state-owned firm 1Malaysia Development Berhad (1MDB).
Reuters said then that protecting the ringgit from political fallout may end up costing Malaysia more than any bailout for 1MDB, based on the rate that Bank Negara Malaysia was using its foreign reserves for the currency intervention.
Financial news wire Bloomberg reported the ringgit—which had seen its value fall to a 16-year low recently—depreciating for the fourth straight day today to 3.8650 per US dollar as crude oil prices fell below the US$50 per barrel mark for the first time this year.
The weakening ringgit value suggested that Bank Negara Malaysia was “stepping away from supporting” the currency, Bloomberg reported yesterday, citing Australia & New Zealand Banking Group Ltd strategist Khoon Goh.