Ringgit gets currency strategists’ vote of confidence

NST, May 1, 2014

KUALA LUMPUR: Currency strategists are giving Malaysia a vote of confidence just weeks after the government came under criticism for its handling of a probe into the disappearance of Malaysia Airlines (MAS) flight MH370 with 239 people on board.

A growing number of analysts say steps by Prime Minister Datuk Seri Najib Razak to end 16 years of budget deficits will outweigh any short-term negative reaction towards the country, which has suffered an exodus of Chinese tourists since the MAS jet bound for Beijing vanished on March 8. The ringgit lost value in five of the past seven weeks even though economic growth is seen accelerating this year.

Bank of America Corp named the ringgit one of its two favourite Asian currencies this month, while Wells Fargo & Co raised its year-end estimate to forecast a 2.7 per cent rally to 3.18 per dollar and Societe Generale SA predicted a level of 3.15. A measure of purchasing power parity shows it to be the cheapest of nine Asian currencies tracked by Bloomberg.

“Malaysia’s trade balance is expanding and its growth is driven by exports and investment, which will offset any potential decline in tourism after the plane inci-dent,” Albert Leung, a strategist at Bank of America in Hong Kong, said. “The fiscal consolidation story has some incentive for them to have to keep improving.”

Bank of America said the ringgit and South Korean won are Asia’s best prospects.

The ringgit is 53 per cent undervalued, according to the Economist magazine’s Big Mac index that measures purchasing power parity based on the cost of McDonald’s Corp’s hamburger in different countries.

The currency touched 3.3511 on February 4, the weakest level since May 2010, before starting a rally that has left it 0.3 per cent higher since the start of the year. It has fallen 0.1 per cent in April, following two months of gains.

“I don’t really think the airline incident changes anything,” Steffen Reichold, an emerging-market economist at Stone Harbor Investment Partners LP, said from New York. “The economy has been performing reasonably well. It’s one of the high-growth currencies.”

Malaysia, whose US$305 billio (RM995 billion) economy is smaller than Taiwan’s US$355 billion and larger than Singapore’s US$275 billion, has run budget shortfalls every year from 1998.

There are signs of a rosier picture emerging. Najib’s cuts to fuel subsidies, increased electricity tariffs and plans for a consumption tax have prompted the central bank to predict the fiscal deficit will narrow to 3.5 per cent of GDP in 2014, from 3.9 per cent last year.

“Those are steps in the right direction, which should help boost investor sentiment,” Benoit Anne, head of emerging-market strategy at Societe Generale, said. The ringgit “has lagged most of its peers, and with the recovery in risk appetite, the chasing-the-laggards behaviour should support it”, he said.

Options traders are the most optimistic about the ringgit in more than a year, according to data compiled by Bloomberg. The premium on three-month contracts giving the right to sell the currency over those allowing for purchases fell to 1.1 percentage point on April 10, the smallest gap since January 2013 and down from as much as 2.55 percentage points in August.

The surplus in Malaysia’s current account, the broadest measure of trade, widened to RM16.2 billion in the fourth quarter, from RM2.55 billion in the April to June period last year, which was the smallest excess on record.

Factory output increased 6.7 per cent in February, the most since July, while GDP will expand 5.05 per cent this year, according to a Bloomberg survey of economists.

“The improving outlook for Malaysia’s economy and fiscal position, along with a benign global market environment, have been supporting a stronger ringgit,” Eric Viloria, a strategist at Wells Fargo in New York, said. “Steady and gradual Fed tapering is also a key factor in the forecast upgrade.” Bloomberg