WITH the ringgit hitting its lowest mark in three months yesterday, continued negative news headlines will only drag it further south in the near term, said currency experts.

The ringgit closed at RM4.133 to US$1 yesterday, marking it as the lowest exchange rate in almost three months.

“We expect further near-term negative pressure on the MYR (ringgit). The confluence of negative global and domestic headlines have yet to run its course,” OCBC Bank’s currency economist, Terence Wu, told The Malaysian Insight.

He was referring to Monday’s news about global index provider FTSE Russell reviewing Malaysia’s market accessibility level in its World Government Bond Index (WGBI) over concerns about market liquidity.

Morgan Stanley in a research note said about US$8 billion (RM33 billion) would flow out of Malaysia if its bonds are downgraded by FTSE Russell.

Likewise, he said, local headlines like those involving Felda’s mismanagement were also bad.

Wu said the weakness in the local unit is sentiment-driven, fuelled by negative news, some of which were speculations.

He, however, said there has not been excessive capital flight from the country to warrant panic.

On the equity front, the momentum of investors pulling money from selling their holdings has seen some moderation.

Malaysia’s trade performance where exports have slowed down is not out of line with the rest of Asia. All of these, coupled with improvements in foreign reserves, are signs that investors are not panicking, he added.

“We continue to see no signs of excessive investor panic and do not believe that it will significantly impinge on Malaysia’s macro-economic fundamentals on a longer-term basis.

“On the structural horizon, we think the ringgit should still benefit from a softer USD and firmer RMB (renminbi) complex.

“Therefore, we expect the USD-MYR (gap) to be lower by year-end compared to current levels.”

FXTM market analyst Tan Chung Han told The Malaysian Insight that the weakness in ringgit is transitory and markets are yet to factor in the resilient economic fundamentals of Malaysia.

“We expect the weakness in the ringgit to be transitory as Malaysia’s resilient economic fundamentals are still awaiting their next chance to make their case before the markets.”

The projected economic growth of between 4.3% and 4.8% for 2019 is higher than what major economies are expecting, he said.

The sentiments surrounding the Malaysian currency are swayed by external headwinds, such as US-China trade tensions and slowdown in global growth, he said.

“The Malaysian economy remains exposed to external factors such as the US-China trade tensions and the broader slowdown in the global economy, while headlines about the potential removal of Malaysian bonds from global indices may have lent itself to a bout of ‘buy the rumour, sell the news’ (although in this case, it’s inverse), contributing to the ringgit’s recent but potentially transitory weakness.”

Commenting on concerns of potential downgrades, Tan said it is also important to take into account the increased appetite by foreign investors for Malaysian bonds.

He said while capital outflows would put downward pressure on any currency, however, it is also important to note that Bank Negara’s data pointed that Malaysian bonds registered net buying by foreign investors during the first quarter of 2019.

It was reported that in the first quarter of 2019, the government topped the list in the Overall Top Traded Bond category with RM271.08 billion, up from RM126.31 billion in the fourth quarter of last year, according to the Bond Pricing Agency Malaysia.

“However, it remains to be seen whether Malaysia will actually be dropped from the FTSE World Government Bond index.

“Even then, active funds may still focus on Malaysia’s accommodative monetary policy stance and robust domestic economic fundamentals when making their investment decisions.”

Meanwhile, Wu said if Malaysia is dropped from the index, a short-term outflow can be expected in the Malaysian sovereign bond space.

However, he said while the decision has not been made, the reaction was overblown.

“Note that the decision has not been taken just yet. It is subjected to an assessment in September. Recent reaction in the USD-MYR appears somewhat overblown.”

He added that the strengthening of the ringgit against the greenback also depends on the decision.  – April 18, 2019.