The ringgit will be less volatile this year compared with last year as the economy stabilises.
Moody’s Investors Service vice-president and senior credit officer Christian de Guzman said the ringgit “is fairly valued at current levels”.The US dollar has weakened against the ringgit in the past two weeks. From a high of 4.49 on April 1, the greenback closed at 4.35 yesterday, down 3.27% since the beginning of the month.De Guzman said at a media roundtable that the ringgit would remain vulnerable to outflows due to the dwindling current account (CA) surplus.“In the current context, there is indeed a greater vulnerability in Malaysia because of the dwindling CA surplus as historically the CA surplus was much wider, in excess of 10% of gross domestic product (GDP) per year before the global financial crisis and that has dwindled to around 2% of GDP,” he said.
He pointed out that a large proportion of the outflow was driven by short-term funds that had bought into Malaysian government bonds over the past few years.While de Guzman sees the CA surplus stabilising due to the pick-up in exports, which in turn will bolster the economy, the smaller CA surplus will no longer provide the sufficient buffer against the capital outflows as before.He explained that the volatility stemmed from the capital outflows in certain quarters overwhelming the CA surplus, which narrowed because exports had fallen.
However, de Guzman said the depreciation of the ringgit that was seen last year “will unlikely to play out again this year” because of a stabilising economy and the pick-up in exports as well as commodity prices. Moody’s expects the economy to grow by 4.3% year-on-year this year and next.“We don’t think the outflows themselves represent a meaningful risk to government liquidity which we think is mitigated by the continued depth of the local capital market and the availability of the pool of savings, especially of the very large institutional funds like the Employees Provident Fund (EPF) that continue to grow its investable funds due to the stable employment conditions,” de Guzman said, adding that the stable labour conditions meant continued contributions to the EPF.
He noted that while the Government has demonstrated a continued commitment to fiscal consolidation even against the backdrop of difficult economic conditions, a looming election together with some fiscal space afforded by higher oil prices could see more government spending or slow down on more reforms.De Guzman said this could be discerned from Budget 2017, which did not mention anything about more fiscal reforms. He expects more reforms, especially to raise revenue, after the general election.“One thing to note about the reforms is that in order to actually achieve the medium-term target by 2020, important fiscal reforms need to happen so that fiscal consolidation can proceed at a more significant pace.“But what we’ve actually seen is that while the fiscal consolidation trend is intact, the degree of improvement has declined over the past few years,” he said.
The medium-term target refers to the Government’s target of having a balanced budget by 2020.On the matter of 1Malaysia Development Bhd (1MDB) having to pay US$1.2bil this year to Abu Dhabi’s sovereign wealth fund, International Petroleum Investment Co, after having reached an agreement over arbitration proceedings involving two US dollar bonds amounting to US$3.5bil, he said the risks surrounding the government’s contingent liabilities remain.“The recent announcement by 1MDB and MOF Inc really doesn’t change our view that contingent risks from 1MDB are still present.“I don’t think it’s a material development (the arbitration) in terms of resolving the entire issue as the bonds continue to be outstanding and so long as the bonds are outstanding, there will be contingent risks.
“However, we want to acknowledge that in the past couple of years there have been developments in terms of consolidating 1MDB’s debt,” de Guzman said.