Ringgit forecast to soften temporarily
FOLLOWING the surprise victory of the Pakatan Harapan (PH) coalition in the 14th general election, the ringgit is widely expected to weaken on Monday.
Like it or not, the first democratic change in federal power from Barisan Nasional (BN) to PH will keep investors cautious, and the ringgit is expected to come under pressure temporarily.
Kelvin Tay, regional chief investment officer at UBS Wealth Management, says PH’s clear victory is likely to lead to a period of volatility in ringgit-denominated assets due to the populist policies that it has pledged to implement in the first 100 days of coming to power.
“Offshore assets have been jittery, with the iShares MSCI Malaysia exchange-traded fund falling 6% overnight and ringgit forwards hitting 2018 lows,” he says in a report dated May 11.
UBS has raised the ringgit forecast from 3.80 to 4.10 against the US dollar in three months, and from 3.80 to 4.00 against the greenback in six months.
“Based on the election manifesto of the incoming government, we believe the ringgit is exposed to downside risk towards 4.10 versus the US dollar,” says Tay.
The ringgit could lose some ground for two reasons.
Firstly, in its election manifesto, PH committed to several populist measures, including abolishing the Goods and Services Tax (GST), which has helped offset the decline in oil-related revenue.
Secondly, the outlook for China’s foreign direct investment in Malaysia could become hazier, given new Prime Minister Tun Dr Mahathir Mohamad’s recent comment that he will look more critically at it.
“PH aims to replace the GST with the former Sales and Services Tax (SST), which could trigger adverse reactions from bond-rating agencies, since revenue contribution to the government’s budget from the GST is around 3% of GDP, while the SST’s is around 1.5%,” says Tay.
He explains that a less friendly stance by the government towards Chinese inflows could weigh on sentiment on the ringgit, especially as Malaysia’s current account surplus plunged to around 3% of GDP last year from as high as 18% in 2009.
On a positive note, outsized moves on the ringgit are likely to be limited as exporters have to convert at least 75% of their overseas revenue immediately to the local currency.
In addition, from a valuation perspective, the ringgit has some room to catch up with higher commodity prices, which is an argument against a larger sell-off in the ringgit.
On a longer-term horizon, UBS is keeping its 12-month forecast unchanged at 3.75 for now, as market sentiment on the ringgit could stabilise at a later stage should the new government subsequently adopt a softer tone towards foreign direct investments.
It is noteworthy that Fitch Ratings affirmed its A- rating on Malaysia with a stable outlook last Friday. It said the election result was unlikely to lead to a significant economic policy shift.
However, the global rating agency highlighted policy slippage leading to deterioration in fiscal discipline and higher government debt or deficits as a negative rating sensitivity.
A senior official from a credit rating agency, who asked to remain anonymous, says a short-term loss for the ringgit is a long-term gain for the country.
“A lot of mega infrastructure projects … their costs were way, way inflated because there were many unnecessary costs. If the new government can reduce wastage, we will have a lot of extra expenditure. After all, many of these projects can be delayed,” he says.
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