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USD/MYR
forecast, eop
Latest Prev
Close 3.27 3.18
2Q08 3.27 3.25
3Q08 3.30 3.15
4Q08 3.35 3.00
1Q09 3.40 3.15
2Q09 3.45 3.14
3Q09 3.40 3.14
4Q09 3.35 3.13
BNM o/n policy rate
forecast, eop
Latest Prev
Close 3.50 3.50
2Q08 4.00 3.50
3Q08 4.00 3.50
4Q08 4.00 3.50
1Q09 4.00 3.50
2Q09 4.00 3.50
3Q09 4.00 3.50
4Q09 4.00 3.50
Latest close on Jun 11
Prev close on Mar 12
Malaysian ringgit – dominated by political uncertainties
As predicted in our previous quarterly, the appreciating MYR corrected in 2Q08.
The MYR appreciated to 3.1280 against the USD on Apr 23, its strongest level
since Oct 1997. Like other Asian currencies, the MYR succumbed to a stronger
USD on market expectations for the US to start taking back its rate cuts as early
as 4Q08. Domestically, the MYR was also undermined by post-election political
uncertainties, the key risk confronting the MYR this year
Uncertainties emerged after the ruling Barisan Nasional (BN) coalition lost its
two-thirds parliamentary majority at the general elections held on Mar 8. The
coalition also ceded control of 5 out of the 13 states to the opposition. Since
then, PM Abdullah Badawi has been facing increasing pressures to step down.
His predecessor, Mahathir Mohamad, quit the United Malaysia National Organization
(UMNO) on May 20 in protest of Badawi’s leadership. Oppositon leader Anwar
Ibrahim declared his intention to seize power by persuading BN lawmakers to
defect to his coalition. Anwar is hoping that the unpopular fuel price hikes
would hasten the fall of the BN coalition. For now, the prime minister’s fate is
expected to be decided at the UMNO annual congress due in Dec 2008.
Adding to political uncertainties here is the government’s decision to reform
fuel subsidies on Jun 4. While this is positive for cushioning Malaysia’s fiscal
finances against record high international energy prices, the subsequent 41%
jump in petrol prices and 63% rise in diesel prices are likely to add to inflation.
To ease the pain on consumers, the government intends to widen the social
safety net for the poor, encourage government department to save costs, widen
the list of price-controlled items and make a decision by August whether to
reduce road toll rates.
Politics aside, we do expect the fuel price hikes to lift inflation to 5.8% YoY in
Jun08. Inflation has already doubled to 3.0% YoY in Apr08 from 1.4% in Jun07.
Hence, Bank Negara Malaysia (BNM) is now expected to hike its overnight policy
rate by 50bps to 4.00%, which will be its first rate move since May 2006.
As for the MYR, the KL stock market index will become an important gauge of
investor sentiment to domestic politics. In the end, we expect BNM to maintain
control of the exchange rate and keep the MYR aligned to Asian currencies.
Without the political uncertainties, the MYR would have been a strong currency.
Unlike many of its Asian peers, Malaysia’s trade surpluses are not threatened by
costlier energy imports, thanks to its net oil exporter status. In its latest semiannual
currency report, the US Treasury considers the MYR an undervalued currency
based on its large current account surpluses and low domestic investment.
MYR is no longer ignoring downside risks in stocks
1700
1600
1500
1400
1300
1200
1100
1000
900
USD/MYR
(inverted, rhs)
KL Composite
index (lhs)
3.10
3.20
3.30
3.40
3.50
3.60
3.70
3.80
Trade surpluses held up against record oil prices
MYR bn
12
10
8
6
4
2
0
-2
800
Jan-05 Jan-06 Jan-07 Jan-08
3.90
-4
96 97 98 99 00 01 02 03 04 05 06 07 08
36