Nomura: Ringgit's weakening pattern partly due to US dollar's strength

KUALA LUMPUR: Nomura expects the ringgit to weaken to 4.52 against the US dollar in 2016 and weaken further to 4.76 in 2017 before rebounding slightly to 4.72 in 2018, in one of the most bearish forecasts for the Malaysian currency.

Trade experts just a week ago opined that the ringgit would strengthen to 4 against the dollar in 2017, while the Malaysian Institute of Economic Research has said the ringgit’s depreciation is temporary and reiterated that the local note’s intrinsic value against the US dollar should be at 4.05 to 4.10.

Nomura’s Southeast Asia economist Euben Paracuelles said the ringgit will be on a weakening pattern due to the strength of the US dollar, Malaysia’s inability to increase growth differentials against other investment destinations exacerbating risks of capital outflows, and political noise that continues to aggravate risks in the country.

The Japanese financial services firm is expecting the US Federal Reserve to raise interest rates this month, as well as twice more next year. Consequently, it is expecting Bank Negara Malaysia to cut rates in the first quarter and fourth quarter of next year, to see the Overnight Policy Rate reduced to 2.5% in 2017 and 2018, from 3% in 2016.

“Given the sentiment around the political dynamics in the last two years, the general election (expected to be called in the second quarter next year) will be negative for growth,” Paracuelles told a media briefing via teleconference here yesterday.

He said Nomura has been assigning Malaysia in the resilient category despite low commodity prices and political risks in the last 1½ years, because growth is able to hold up despite the headwinds. “But we expect that in 2017, the country’s resilience will start to approach its limit.”

He said demand for Malaysian manufacturing exports to the US has shown signs of slowing down, exacerbated by uncertainties from the US presidential election. Malaysia’s export-oriented economy is exposed to a more inward-looking US, and while the central bank’s move to make exporters convert 75% of export proceeds to ringgit will help somewhat, Paracuelles opined that it would only work to a small extent.

“The size of Malaysian exports suggests that the slowdown in that sector will have a lot of spillovers to private consumption and private investment and there’s not much policy buffers.

“We know that the government is maintaining its fiscal consolidation, which is commendable for the sovereign rating but, at the same time, it’s also going to be a drag on growth from the fiscal situation,” he said.

Despite the headwinds, he does not expect a deterioration of the Malaysian economy towards the Asian financial crisis scenario, as the government’s ongoing fiscal reforms and diversification of its revenues sources have kept debt levels in check.

Paracuelles estimates Malaysia’s gross domestic product growth to come in at 4.1% in 2016 and 3.7% in 2017 and 2018.
Meanwhile, Nomura Southeast Asia equity strategist Shubhankar (Mixo) Das is underweight on Malaysia’s market with a downside or flattish outlook for Asian equities.

“We had tried to be more constructive on the (Malaysian) market and expect better growth outlook but we face pressure in terms of the fiscal consolidation going on that is expected to continue. Many of the supporters of growth in Malaysia are starting to fade. Earnings in specific sectors in Malaysia are also facing sector-specific downside pressures, such as banks, consumer and palm oil,” said Mixo.

Despite the weak earnings profile, he said, the Malaysian market is not cheap. It is the third most expensive market in the region after Thailand and China.

“All in all, a mediocre outlook going into next year. Value is going to be a key factor in the first half. Keep rotating your holdings and pick up cheap stocks. We do see some of the strong companies generating good returns such as Public Bank, Malaysia Airports Holdings, AirAsia, IJM Corp and Petronas Chemicals,” said Mixo.