Published March 4, 2009

Ringgit could breach 3.80 mark soon

Exchange rate at risk of falling more on perception of rising credit risk

By PAULINE NG
IN KUALA LUMPUR

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THE Malaysian ringgit could breach the psychological 3.80 to the greenback mark in the not too distant future, nudged by a deepening global recession and resultant flight to quality, plus a widening budget deficit.

Previously, few would have entertained the notion of the local unit tumbling back to 3.80 - the level at which it was fixed in 1998 during the Asian financial crisis before the peg was dismantled in 2005 - but it appears a distinct possibility now.

On the back of weakening exports and a growing budget shortfall, the ringgit climbed to within a 3.62/63 band a month ago.

Yesterday, it opened at 3.727/731 from Monday's close of 3.726/730.

Only about 2 per cent off the psychological mark, Malaysia's second stimulus package or mini-budget could see push come to shove.

The size of the injection is still under wraps, but some economists believe it could be up to RM25 billion (S$10.4 billion) - a sum that would swell the current budget deficit of 4.8 per cent of gross domestic product (GDP) to over 8 per cent.

Rating Agency Malaysia (RAM) chief economist Yeah Kim Leng has projected a more moderate package of around RM10 billion - which could still raise the budget shortfall to 5.5-6 per cent of GDP.

Depending on the amount unveiled next week, most see the exchange rate at risk of crumbling further on the perception of rising credit risk.

Mr Yeah said the country's strong trade balance, current account surplus and foreign reserves should underpin the strength of the ringgit. But because the local currency is tracking regional units that are caught up in the export collapse - which in turn has made them vulnerable to a recession - it cannot escape the flight to US-denominated assets.

Indeed, Malaysia's export-led economy grew only 0.1 per cent in the last quarter after exports shrank 18 per cent in the last three months.

Central bank governor Zeti Akhtar Aziz yesterday attributed the ringgit's recent three-year lows partly to the global trend of deleveraging the dollar and repatriating the funds back to the United States.

The situation was not unique to Malaysia, she observed, alluding to the slump in other major and regional currencies.

In Malaysia's case, over an eight- month period to mid-February, its foreign reserves dropped US$34 billion to US$92 billion.

RAM's Mr Yeah believes the flight to US assets is 'overdone' given America's humongous economic mess, and that the adjustments would likely be short-term. Once the various stimulus packages kick in, domestic demand should improve and return some stability to the markets. He expects global demand to bottom out by the second half, after which the currency ought to strengthen.

Bank Negara is seen as less likely to intervene in the currency market should the ringgit continue to weaken in line with other regional currencies.