Markets
Prospects intact for ringgit to firm against USD
Cheah Chor Sooi 
ANALYSTS are cautiously optimistic that the ringgit will shine in the second half (H2) it appreciated 4% against the greenback to close at 4.2928 per US dollar as the curtain came down on the first half (H1).

PublicInvest Research described the local currency as having reached the halfway mark towards its expectation of hitting at least 4.10 to 4.15 in H2 after having dived to a fresh 19-year low of 4.4975 against the greenback on Jan 4.

The research house based its prediction on (i) further capital inflows owing to the strength in the domestic economic recovery, and (ii) less pronounced bond-related outflows as interest rate volatilities take a temporary backseat, amongst others.

Potential risks
Moreover, the move by Bank Negara Malaysia (BNM) at end-2016 to compel exporters to convert a portion of their US dollar proceeds into ringgit is also expected to provide further support.

“While we are longer term positive on the ringgit and still see it undervalued at current levels, it would be irresponsible of us not to highlight potential risks to our currency, principally of which is the high foreign holding of local debt,” PublicInvest Research noted in a recent H2 market strategy report.

As of end-May, foreign holdings of local government debt stood at RM151.4 bil while a further RM20.2 bil is held in Malaysian Government Investment Issues (MGII), RM6.9 bil in Bank Negara Monetary Notes and about RM16.6 bil in private sector debt for a staggering total of RM195.1 bil.

On a more bullish note, Bank Negara’s international reserves rose further to US$98.7 bil (equivalent to RM436.1 bil) as of June 15, up US$700 mil from US$98 bil a fortnight earlier. The amount of reserves is sufficient to finance 8.2 months of retained imports and is 1.1 times the short-term external debt.

“A complete capital flight is possible, though not probable,” argued the research house. “Worst case, domestic liquidity remains amply sufficient to take up any slack, though yields may temporarily shoot through the roof, depending on depth and speed of outflow.”

While not to say the entirety will be utilised, PublicInvest Research pointed out that statutory agencies and financial institutions do hold a collective RM324.9 bil in deposits as of end-April to help mitigate should such need really arise.

Other views
Elsewhere, MIDF Research expects the ringgit to remain below 4.30 per US dollar throughout H2. Ringgit has continued to stay on the recovery path despite a slight rise in the greenback by 0.1% to 4.2928 during the week of June 26-30.

“We foresee the ringgit to touch 4.20 by year-end due to improvement in market confidence as well as steady economic growth in domestic and external market activities,” the research house noted in its Weekly Money Review (for the week ended June 30).

However, Hong Leong Investment Bank (HLIB) Research is more pessimistic as it expects the ringgit to weaken slightly in H2 due to a confluence of factors. Externally, it opined that the commencement of the US Federal Reserve balance sheet unwinding might cause the greenback to regain some strength following a global portfolio reallocation.

“Fed’s plans coupled with recent weakening of oil prices could limit the interest on Malaysian assets,” justified the research house. “On the local front, bond outflows may resurface given the series of government bond maturity from August onwards [RM49 bil; January-June: RM29 bil].”

Consequently, HLIB Research maintained its stance that the ringgit could move back to its forecast range of 4.30 to 4.40 in H2.

Flow reversal
At current exchange rates, despite the ringgit having strengthened 4.4% year-to-date, PublicInvest Research still expects incentives for re-entry into the equity market as the country’s economic fundamentals remain largely intact.

In the research house’s view, exports are holding steady despite the challenging external environment while it foresees scope for further earnings improvements in corporate Malaysia should macroeconomic conditions pick up a notch or two. Fundamentally, economic growth has been robust as reflected by the first quarter’s (Q1) 5.6% gross domestic product growth (Q4 2016: 4.5%).

“Imagine yourself a foreign investor taking a stand and buying into the arguments we laid out at the end of last year, you would be sitting pretty on a combined gain of 12.3% from investments into FBM KLCI-based stocks (4.4% currency gain + 7.9% index gain),” PublicInvest Research pointed out.

On the same note, the research house also highlighted that net flows into the equity market have more significant bearing on the movement of the ringgit in contrast to flows in and out of the bond market.

While possibly purely coincidental or perhaps a result of larger-scale foreign direct investments which saw a greater demand for the ringgit, the research house noticed that net flows into equities saw 15 corresponding movements in the ringgit (be it up or down) versus nine for bonds.

“Our take is that should the ringgit still remain slightly undervalued at current levels, net foreign flows into the equity market should remain positive for the remainder of the year,” suggests PublicInvest Research.

No Budget 2017 revision
On a more assuring note, RHB Research Institute economists Vincent Loo Yeong Hong and Aris Nazman Maslan opined that the government is unlikely to make any revisions to Budget 2017 for now despite a sharp pull-back in oil prices of late.

If assuming oil prices were to creep lower and average about US$40 (RM171.60) per barrel in H2, the average full year would still be slightly above US$46/barrel which is marginally higher than the Ministry of Finance’s forecast of US$45/barrel for Budget 2017.

“In any case, even if there is a revision, we believe it would likely be done in the forthcoming Budget 2018 on Oct 27 rather than now,” the duo noted in a recent economic update.

Crude oil prices have pulled back sharply in the past few weeks from a high of US$57.10/barrel in early January to hit a 10-month low of US$42.53/barrel on June 21 before recovering to US$48.35/barrel during July 6’s Asian trading hours.

This was mainly on the back of a higher oil production from Libya and Nigeria, as well as the possibility of non-compliance risks related to production cuts. The situation was compounded by the rising crude oil production in the US, specifically on shale production.

This article first appeared in Focus Malaysia Issue 240.