Published January 1, 2009

Ringgit heads for first annual decline in four years

Credit crunch, global slump hurt Malaysia's exports

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(SINGAPORE) Malaysia's ringgit headed for its first annual loss in four years as the credit crunch worldwide and the global economic slump hurt the nation's exports and kept foreign investors wary of risk.

The ringgit has dropped 4.6 per cent against the US dollar this year, the biggest annual decline since the Asian financial crisis of 1997... Offshore forward contracts indicate that it will weaken further.

The currency has dropped 4.6 per cent against the US dollar this year, the biggest annual decline since the Asian financial crisis of 1997. Malaysia ended the ringgit's peg to the US dollar in July 2005. Exports in October unexpectedly fell for the first time in 15 months and the government estimates that the economy will expand at the weakest pace in eight years in 2009. Offshore forward contracts indicate that the ringgit will weaken further.

'In the first quarter of 2009, the ringgit will continue to decline as the fiscal deficit widens and inflows from portfolio flows and export earnings fall,' said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd here. 'It may decline to as low as 3.62 per dollar in the first quarter.'

The ringgit traded 0.3 per cent stronger from Tuesday at 3.4685 a US dollar as at 12.35 pm in Kuala Lumpur, and versus 3.3073 at the end of last year, according to data compiled by Bloomberg.

The currency's loss this year compares with a 26 per cent slide in the South Korean won and a 19 per cent slump in the Indian rupee, the two worst performers among the 10 most-active currencies in Asia outside Japan.

Malaysian exports in October fell 2.6 per cent from a year earlier, after rising 15 per cent in September, as the global slump cut electronics and palm oil sales.

The economy expanded 4.7 per cent in the third quarter from a year earlier, the slowest pace in three years, government data showed on Nov 28. Growth may slow to 3.5 per cent next year, according to the government.

Bank Negara Malaysia last month cut its benchmark interest rate for the first time since 2003, trimming its overnight policy rate by a quarter-percentage point to 3.25 per cent. Governor Zeti Akhtar Aziz said Nov 28 that monetary policies are 'focused on sustaining domestic demand to mitigate the impact of weaker global growth'. The government announced a RM7 billion ringgit (S$2.9 billion) fiscal stimulus package on Nov 4 to support growth.

The benchmark Kuala Lumpur Composite Index of stocks has slumped 39 per cent this year, the most since 1997, compared with a 43 per cent drop in the MSCI Asia Pacific Index of regional shares, Bloomberg data show.

Three-month non-deliverable forward contracts traded at 3.4780, implying a depreciation of 0.3 per cent, according to data compiled by Bloomberg. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. Non-deliverable forwards are settled in US dollars rather than the underlying asset.

The ringgit will fall to 3.65 against the US dollar in the first quarter of 2009, according to the median estimate in a Bloomberg News survey. The currency may decline further to 3.68 per US dollar by mid-2009 before recovering to 3.65 by year-end, the survey showed. -- Bloomberg