PETALING JAYA: The ringgit’s current sell-off is overdone and any removal of Malaysia from the FTSE World Government Bond Index (WGBI) will not impact the country’s fundamentals and credit rating, according to RHB Group Treasury & Global Markets.
Despite that, the local unit extended its losses for the third day to a low of 4.1495 against the dollar today. At 5pm, it was 0.27% lower at 4.1475 to the greenback.
The selling pressure was triggered by the Norway Government Pension Fund Global’s plan to slash emerging market (EM) bonds in early April, as well as FTSE Russell’s announcement that it may drop Malaysian debt from the WGBI on accessibility and liquidity concerns.
“Both headlines disproportionally hit Malaysian assets, with the US dollar/ringgit touching an intraday high of 4.1455, short of the psychological 4.15 handle. We hold the view that markets panicked and overreacted to the news,” the research house said in a note today.
Nonetheless, RHB said Malaysia’s strengthened defences against external volatility should bode well for the ringgit’s medium-term attractiveness, attributed to the improving mix of external debt, robust domestic foreign exchange markets for trading and hedging, consistent current account surplus and far sufficient foreign reserves than recommended by the International Monetary Fund (7.4 months of retained imports).
It sees several factors that can potentially restore confidence in the ringgit over the short term, which include Brent crude prices remaining supported north of US$70 a barrel; improvement in EM sentiment; current account surplus; robust domestic foreign exchange markets enabled by foreign exchange administration rules continuing to offer confidence and stability to real stakeholders of the economy in ringgit trading and hedging; as well as Malaysian bonds to remain underpinned by these factors.
RHB noted that the medium-term outlook of Malaysian bonds remains intact, which should eventually drive foreign inflows into the space.
Meanwhile, Kenanga Research foresees risks of capital flight to be rather contained, with outflow of foreign funds estimated to possibly be anywhere between US$3 billion and US$5 billion, in part due to FTSE Russell’s emphasis that “inclusion on our Watch List is not a guarantee of future action”.
It said this should somewhat help soften the damage to investors’ sentiment, given that the statement suggests enhanced engagement with the government, central bank and regulators in adressing investors’ concerns in the interim period.
“In this regard, we expect the government will do whatever is necessary, regulatory and policy-wise, to ensure its bonds remain in the WGBI and hopefully send a positive signal to the global market in terms of quality of its debt instruments,“ Kenanga explained.
However, its expectation of a rate cut of 25 basis points in 2019 remains intact, though the window to cut may have narrowed marginally given the additional outflow at hand arising from the FTSE Russell’s announcement.
