Malaysian ringgit, equities face stronger headwinds in the face of early election

The ringgit has slumped to its lowest levels in more than 24 years against the greenback. PHOTO: ST FILE

KUALA LUMPUR - The sliding ringgit is expected to become a political hot potato in the next election, which is widely expected to come on the heels of next week's tabling of the federal government budget.

Malaysian economists and political analysts do not expect Prime Minister Ismail Sabri Yaakob's administration to deliver a reform-centric budget on Oct 7.

This has been affirmed by those in the inner circle of Ahmad Zahid Hamidi, president of the ruling Umno party. "We can expect a budget filled with vote-getting elements," said one senior Umno politician.

Umno politicians close to Zahid said Parliament could be dissolved days after the budget to pave the way for polls to be held as early as late October or some time in the first two weeks of November.

Their faction has been pushing for an early national election although this is not due till September 2023.

The top five leaders from Umno - including Datuk Seri Ismail, who is also one of the party's vice-presidents - are set to meet on Friday to discuss the dissolution of Parliament and when polls will be held.

Political analysts do not expect any single party to get an outright majority in the 222-member Lower House, which will cloud the country's already troubled economic outlook.

The ringgit has slumped to its lowest levels in more than 24 years against the greenback, falling to RM4.65 against the US dollar during trading on Thursday.

Meanwhile, the benchmark stock exchange index posted its seventh consecutive day of losses to close at 1,397.5 points, down 4.39 points from Wednesday.

Thursday's close was very near the 1,400-point psychological level that the benchmark index has held to for more than a year, and currency traders noted that the continued bearish sentiment could push the ringgit closer to 4.80 against the US dollar in the coming weeks.

"(Central bank) Negara is the only one supporting the ringgit on a daily basis, and the big question is, how much of our (foreign) exchange reserves are going towards this losing proposition?" noted a head of treasury at a Malaysian state-controlled bank, who asked not to be named.

World Bank lead economist for Malaysia Apurva Sanghi told reporters this week that "there is no easy fix" for Malaysia.

"Bank Negara is doing what it can, but basically the strength of the currency will depend on how well the economy will perform and how well Malaysia can keep its focus on its fundamentals and structural reforms," he said.

While the World Bank has raised its forecast for the Malaysian economy to expand by 6.4 per cent this year, up from its earlier prediction of 5.5 per cent, this is largely due to a low-base effect. It also warned that growth will fall to 4.2 per cent amid significant headwinds in 2023.

There are multiple red flags, ranging from the government's huge debt burden and its shrinking revenue base to Malaysia's failure to boost domestic and foreign direct investment into the economy.

Malaysia's federal government debt is expected to rise to RM1.16 trillion (S$362 billion) in 2023, up from RM1.077 trillion this year. Unless Malaysia sharply cuts back on its subsidy bill that is estimated at RM80 billion this year, the government may have to borrow to cover part of its debt repayments next year.

Malaysia also needs to reverse the declining trend in the country's ability to attract investors. Official statistics show that Malaysia's share of foreign direct investment flowing into Asean has fallen from 24 per cent in the 10 years ending 1997 to just over 8 per cent for the 10 years ending 2020.

In the immediate term, the major concern is over the slumping ringgit against the greenback because about 80 per cent of the country's exports and imports are invoiced in United States dollars, which economists warn would result in spikes in imported inflation for the Malaysian consumer.

The ringgit's depreciation has also had a direct correlation to the country's foreign reserves, which currency dealers noted were being used to defend the currency in the foreign exchange market.

Malaysia's forex reserves, which have continued to shrink from US$116.9 billion (S$167.4 billion) in the beginning of the year, stood at US$108.2 billion in end-August, down from US$109 billion in end-June.

Chairman of the opposition Democratic Action Party and former finance minister Lim Guan Eng noted that the strengthening US dollar is set to sharply increase the government's burden in the repayment of its 1Malaysia Development Berhad (1MDB) debt.

Three tranches of US dollar 1MDB bonds amounting to US$6.5 billion that were arranged by Goldman Sachs in 2012 and 2013 are set to mature in the coming months.

When the bonds were issued, the local currency stood at RM3.35 to the dollar, valuing the principal amount raised at RM21.8 billion. Based on Thursday's foreign exchange rate of RM4.65, the principal amount due currently stands at RM30.23 billion, or roughly RM8.45 billion more.

The last time Malaysia held elections barely weeks after the budget was delivered was in 1999, when then Premier Mahathir Mohamad dissolved Parliament in the first week of November and held polls three weeks later.

The ruling Umno-led coalition won comfortably with a two-thirds majority then.

But the outcome this time round is unpredictable, with the majority ethnic Malay community that makes up more than 60 per cent of the population divided in its political allegiance like never before.

The 1MDB corruption scandal saw Umno toppled from power for the first time in history at the May 2018 elections. Factional politics saw power at the federal government changing hands three times, with Umno returning to power and Mr Ismail taking office as part of a volatile coalition in August last year.

Join ST's Telegram channel and get the latest breaking news delivered to you.