More woes for sliding ringgit with likely rate cuts ahead

KUALA LUMPUR • The bad news just does not stop for Asia's worst- performing currency.

Already reeling from a renewed slump in oil prices and a political scandal that just will not go away, the Malaysian ringgit is now facing the prospect of another cut in interest rates.

It has been the region's biggest loser in the past month and analysts still see scope for it to drop more than 2 per cent by year-end.

The currency's slide highlights all is not well as the nation's economy heads for its worst performance this decade.

Crude oil's plunge to a four- month low this week undermines the finances of net oil exporter Malaysia, while the appeal of its relatively high bond yields is being tempered by the scandals surrounding a troubled state investment fund.

Rabobank Group and UBS Group both predict Bank Negara Malaysia will add to its first rate cut in seven years in the coming months. Another rate reduction "will be a further negative for the currency because one of the things that's attractive about it is it's got a relatively high yield", said Mr Michael Every, head of financial markets research at Rabobank in Hong Kong.

Brent crude's 13 per cent slump this quarter is exacerbating Malaysia's woes. Sliding energy prices have eroded export earnings and rising costs are curbing business investment.

Economic growth slowed to the least in more than six years in the first quarter, and analysts project it will ease to 4.2 per cent for the year as a whole, the least since 2009.

The outlook for the currency is linked to oil prices as Malaysia derives 20 per cent of its revenue from energy-related sources.

The nation loses RM450 million (S$149 million) in annual income for every US$1 decline in oil, Prime Minister Najib Razak said in April.

The ringgit has dropped 1.3 per cent in the past month, underperforming regional peers except for the Philippine peso and Indonesia's rupiah. The currency traded at 4.0507 per US dollar yesterday, after being as strong as 3.142 in August 2014, when oil was still above US$100 a barrel.

It is expected to weaken to 4.10 per US dollar by the end of September and 4.15 by year-end. It was trading 3.0141 per Singdollar.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on August 05, 2016, with the headline 'More woes for sliding ringgit with likely rate cuts ahead'. Print Edition | Subscribe