Malaysian Ringgit Under Pressure
The Malaysian Ringgit remains under pressure due to concerns over the impact of persistently weak oil prices on the country’s economy, and the risk of a further devaluation of the Chinese Yuan.
With the supply of oil continuing to exceed demand, it is hard to say when the prices of global crude oil will improve and the pressure on the Ringgit will subside.
Declining crude oil prices have a negative impact on investor sentiment towards Malaysia due to the country’s reliance on oil and gas as a source of revenue, and the sector being one of the key drivers of Malaysia’s economic growth.
Maybank Investment Bank predicts that the crude oil price situation is certainly one of the major risks to watch out for in 2016, as it is one of the factors that have contributed to the downward pressure on the Ringgit. The main issue here is the implication of crude oil prices on the country’s budget deficit. In their estimate, if the average crude oil prices were to decline by another US$10 per barrel from the Government estimate, there could be a risk of Malaysia’s budget deficit widening by another 0.5%, and that could further dampen the Ringgit.
Malaysia unveiled its Budget 2016 in October based on the assumption that crude oil prices would average US$48 per barrel. The budget had estimated about 19% of the Government’s revenue in 2016 to come from oil and gas related activities. The Government’s target was to cut its budget deficit-to-gross domestic product ratio in 2016 to 3.1% from the estimated 3.2% in 2015.
The Government will review Budget 2016 if crude oil prices were to remain at the current low levels.
A research head from a local brokerage commented that, “While investors have mostly priced in low oil prices and a weak Ringgit, no one is expecting both oil prices and the Ringgit to suddenly recover, as there is just no catalyst in sight.”
Having lost about 18% against the US dollar since the beginning of 2015, the Ringgit stands as the worst-performing currency in Asia year-to-date.
To a large extent, the weakness of the Ringgit has been attributed to declining crude oil prices. This has exacerbated the impact on Malaysia of ongoing foreign capital outflows from emerging economies, as the United States is now preparing to raise its interest rates.
Analysts and leaders of major oil firms said there was little sign that global crude oil prices could strengthen any time soon. The consensus expectation was that prices of the commodity would remain weak throughout 2016.
At present, the main reason for the downward pressure on global crude oil prices was the oversupply due to the Organisation of the Petroleum Exporting Countries’ (OPEC) recent decision of not limiting its output and strong production of non-OPEC members.
However, MIDF Research is not too negative about the direction of global crude oil prices in 2016. They expect crude oil prices to possibly trade within an average of US$50 per barrel. Their assumption was based on the global asset breakeven prices and average fiscal breakeven prices for global oil-producing countries.
MIDF further explained that, “Despite contradicting views in the media from various OPEC members regarding oil price expectations and production levels, we are of the opinion that the low oil price climate will negatively affect all of the OPEC members which could cause the cartel to eventually scale down production.
Meanwhile, there are also concerns that China would resume its move to devalue the Yuan against the US dollar. In the last two weeks, the Yuan currency value have been lowered by about 1.3%. Further devaluation of the Yuan could add pressure on other Asian currencies, including the Ringgit. China’s move to deliberately continue to devalue its currency to boost exports and the country’s growth could create fresh turmoil in regional currencies, including the Ringgit.
The Chinese Yuan is projected to devalue further to around 6.7 to the US dollar by the end of 2016.