Ringgit crisis far from being over: Bank of America Merrill Lynch economist

PETALING JAYA: The current ringgit crisis may not be as dire as that during the Asian Financial Crisis in 1997, but there remains significant downside risk even after the correction compared with the situation almost two decades ago, said Bank of America Merrill Lynch.
"We also think that the exchange rate depreciation is having a much more limited impact this time compared with 1997, which may require a larger adjustment to support growth as a result. The current political crisis, sparked by the 1MDB (1Malaysia Development Bhd) scandal, is also the worst in Malaysia's history," its economist Chua Hak Bin said in a report yesterday.

Compared with 1997, he said, Malaysia's current account balance position is much stronger, corporate leverage is more moderate, dependence on foreign-currency denominated debt is not as high and the banking system appears to be better capitalised.
However, there are also leverage indicators, which are much higher than in 1997. Household debt is almost double as a share of gross domestic product (86% of GDP vs 46% in 1997). Public debt is significantly higher (54% of GDP vs 31% in 1997), especially if government guarantees and off balance sheet liabilities are taken into account (at 70% of GDP).

External debt, taking into account foreign ownership of local currency assets, is also significantly higher (70% of GDP vs 44% in 1997) .
"Even though liabilities may not balloon as foreigners reduce their investments, the unwinding will still pressure the ringgit and Bank Negara Malaysia's (BNM) foreign exchange reserves position. Collapsing oil and gas prices are also hurting Petroliam Nasional Bhd (Petronas), the lender of last resort, which arguably came to the rescue in 1997 and in 2008," he said.
He said one major concern is that the current ringgit depreciation is having little impact on exports or the trade balance, in contrast to the 1997 episode.
"In the current episode, the ringgit depreciation has not strengthened exports or improved the trade balance at all," he said.

First, this may be due to the weak ringgit reflecting a severe terms of trade shock, given the sharp decline in export commodity prices, particularly oil, LNG and palm oil prices. Fundamental values have shifted as a result.
Second, the ringgit depreciation is occurring against a backdrop of currency devaluations across the globe, in developed and emerging markets and not just Asia. During the 1997 Asian crisis, Malaysia and the rest of Southeast Asia could still ride on the strength of the US and global economy to lift its exports.

"The 'currency crisis' is more global this time around. We also find the export sensitivity to a weaker ringgit was higher in 1997, by our estimates, in part because of the commodity slump."
Third, he said China's slowdown, on-shoring and recent devaluation is also hurting trade and neutralising the impact from the ringgit depreciation.

"The ringgit weakness is only helping to cushion the negative shock, rather than reviving exports and growth. There is no 'J' (curve) so far, only a flat 'U'. More risks lie ahead. The Fed's tightening cycle will likely lead to further unwinding of the high foreign ownership holdings (of about 47%) of Malaysian government bonds.
"We also cannot see a quick resolution or the end-game of the current 1MDB crisis. BNM governor Zeti's retirement in April next year is also a risk, given that the next Governor may fall short on meeting market expectations for upholding BNM's credibility and independence," said Chua.
Meanwhile, commenting on headline inflation, which eased to +3.1% year-on-year for August, he said despite downside risks to the ringgit he does not think BNM will hike interest rates given risk to growth and asset prices.
He is forecasting Malaysia's headline inflation to average 2.3% this year with the Overnight Policy Rate unchanged for this year and 2016.