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2017 recovery year for ringgit, BNM measures place in check

by December 30, 2017 General

The ringgit kicked off the year lower at 4.4900/4950 against the US dollar on Jan 3, extending 2016’s downside momentum due to excessive speculation in the offshore market, a stronger US dollar, as well as geopolitical uncertainties. — Reuters picThe ringgit kicked off the year lower at 4.4900/4950 against the US dollar on Jan 3, extending 2016’s downside momentum due to excessive speculation in the offshore market, a stronger US dollar, as well as geopolitical uncertainties. — Reuters picKUALA LUMPUR, Dec 30 — The year 2017 was indeed a recovery year for the ringgit, marking a turnaround in a colourful journey supported by positive domestic developments with Bank Negara Malaysia’s (BNM) prudent measures keeping the local currency in check.

Compared to a darker 2016, trading for this year was relatively vibrant that saw the currency rebound strongly from a 19-year low to deliver a total return of 10 per cent.

The ringgit kicked off the year lower at 4.4900/4950 against the US dollar on Jan 3, extending 2016’s downside momentum due to excessive speculation in the offshore market, a stronger US dollar, as well as geopolitical uncertainties.

Prospects for US interest rate hikes which had caused foreign holders of Malaysian bonds to rebalance their portfolios that led to capital outflow, coupled with stronger demand for the greenback, shoved the ringgit to its all-time low for 2017 of 4.4960/4990 on the next day.

Nevertheless, the local unit has since rebounded as improved crude oil prices, Malaysia’s better-than-expected November 2016 export data, and gains on stock market, had convinced traders to buy the ringgit.

In tracking the currency’s movement, the ringgit became more stable in the first quarter (Q1) of this year compared to the last quarter of 2016, thanks to the implementation of BNM’s Financial Market Committee’s (FMC) measures that mitigate the currency’s volatility in foreign exchange (forex) markets.

As a result, the domestic currency appreciated by 1.3 per cent in Q1.

The upward trajectory continued into the second quarter, surging by 3.1 per cent, making the ringgit as the best performing currency in the region during that period.

Support came from the continued weakness in the US dollar which was dampened by policy uncertainties in the country as well as improved non-resident inflows into Malaysia’s financial market mainly driven by encouraging domestic macroeconomic conditions, which included the strong gross domestic product (GDP) growth and exports performance.

The positive economic developments in China, which translate into a better prospect for Malaysia’s export growth, sparked hope that the world’s economy had bottomed out and was starting to bounce back, and along with stable oil price, had kept investors’ risk appetite for the ringgit at a favourable level.   

Market volatility, however, returned in the later part of the third quarter on growing geopolitical tensions between the US and North Korea, causing ringgit-withdrawal, as safe-haven currencies were more promising.

Fortunately, the positive outlook on the Malaysian economy, driven by the bullish second-quarter GDP growth of 5.8 per cent and strong export performance, have led to increased investors interest in domestic financial assets. 

The ringgit rose by 1.6 per cent in the third quarter and was traded below the 4.30-region.

BNM Governor, Tan Sri Muhammad Ibrahim said the ringgit had strengthened to better reflect the real economic activity and was no longer influenced by speculative play.

Following the implementation of FMC’s third series of initiatives, among others, to smoothen liquidity between onshore licensed banks, there were encouraging signs of improvement in the balance of demand and supply of foreign currency, resulting in a more efficient forex market.

BNM said liquidity had improved in the onshore market and was able to meet the hedging needs of both residents and non-residents.

In November, BNM’s hawkish stance on the overnight policy rate (OPR) following the upbeat third-quarter results had further boosted the ringgit and helped offset the impact of broadly higher US dollar.

The central bank had on Nov 9 maintained the OPR at three per cent at its last Monetary Policy Committee meeting for the year, signalling a rate hike could be on the table moving into 2018, of which most economists and analysts believed will likely take place in the first quarter.

The Governor said the central bank may consider reviewing the current degree of monetary accommodation given the strength of the global and domestic macroeconomic conditions.

The central bank has kept the OPR at three per cent since July 2016.

During the last month of 2017, the ringgit moved into the 4.00-level territory, boosted by strong October export forecast, firm crude oil prices and expectation of higher OPR.

The local currency continued its upward trajectory and closed at its second best performance this year at 4.0600/0650 on Dec 4, amid higher foreign buying in the local equity market and subdued US dollar after the Federal Reserve maintained its projections for tightening next year.

The upside momentum strengthened following the positive outlook from international rating agencies and research houses, including the World Bank Group and Moody’s Investors Service, which projected Malaysia’s economy to end 2017 on a firm note and forecasting a stronger 2018.

Gains, however, were then capped by the stronger US dollar due to the spike in US treasury yield.

It gave a challenge for the ringgit to end the year on a firm note.

However, a retreat in the greenback during the last week of trading this year, coupled with the recovery in commodities especially crude oil, crude palm oil and copper, as well as, bullish foreign fund inflows into Malaysia and strong equity market performance have sparked renewed risk appetite for the ringgit.

On Dec 29, the local unit ended the last trading day of 2017 at an all-time high for this year at 4.0440/0500 versus the US dollar compared with 4.4845/4875 on Dec 30, 2016.

Against other currencies, the local unit firmed vis-a-vis the Singapore dollar to 3.0265/0323 from 3.1043/1085 on Dec 30 last year, strengthened against the Japanese yen to 3.5912/5968 from 3.8375/8411 and surged versus the British pound to 5.4602/4687 from 5.5213/5259.

The ringgit, however, depreciated against the euro to 4.8451/8535 year-on-year from 4.7482/7523 previously.

On outlook for the ringgit, traders believed the local currency had a hefty potential to appreciate further from the current level, given the country’s strong underlying fundamentals, robust GDP, improved fiscal position, prospect of OPR hike and better export growth.

They opined that the local unit would make a comeback and re-touch the 3.00-level against the US dollar next year.

Greater capital inflow into Malaysia due to China’s Belt and Road initiative coupled with the anticipation of better global economic environment and stable global crude oil prices would also be the key drivers next year.

RHB Research Institute and AmBank Research both expected the central bank to consider revising upward the OPR by 25 basis points in January next year from the current rate of three per cent, with rates expected to normalise at 3.5 per cent.

UBS Investment Bank opined that the OPR would be reviewed twice next year, once in January and another in the second half of 2018.

Nevertheless, risks such as interest rate hikes by the US Federal Reserve could spoil sentiments.

As for other development in the finance/banking industry, the year was not without its controversy.

Malaysia’s financial system came under the global spotlight after former BNM Assistant Governor, Datuk Abdul Murad Khalid, in January exposed that the central bank had suffered forex losses of US$10 billion in the early 1990’s.

A special taskforce to investigate the probe was formed in February and in April, a Royal Commission of Inquiry (RCI) was established to help reveal more details on the forex losses in the 1980s and 1990s, which were far more than what have been disclosed.

The five-man tribunal, chaired by Tan Sri Mohd Sidek Hassan, who is Petronas Chairman, had called 25 witnesses to testify and a total of 42 documents were admitted within nine days of inquiry, which concluded on Sept 19.

Former Prime Minister Tun Dr Mahathir Mohamad, two former finance ministers — Datuk Seri Anwar Ibrahim and Tun Daim Zainuddin, former BNM Governor Tan Sri Dr Zeti Akhtar Aziz, as well former Second Finance Minister Tan Sri Nor Mohamed Yakcop, were among the witnesses who testified at the inquiry.

Nor Mohamed who was once BNM Adviser said the losses were “a mistake that provided a bitter lesson for the central bank.”

The lesson proved crucial in helping formulate policies to defend the country against the currency attacks during the 1997/98 Asian Financial Crisis, saving the nation hundreds of billions of ringgit that would otherwise have been lost, he said.

He explained unlike Indonesia, Thailand and South Korea, Malaysia was able to overcome the crisis without borrowing from the International Monetary Fund, the World Bank or any other outside parties.

The RCI’s full report was submitted to the Yang di-Pertuan Agong Sultan Muhammad V on Oct 13.

On Nov 30, the commission had tabled its 524-page report in Parliament, revealing that there were elements of hidden facts and information relating to the forex losses suffered by the central bank 30 years ago as well as misleading statements given to the Cabinet, Parliament and the public.

The report found that BNM had lost RM31.5 billion in transactions between 1992 and 1994 and established that Nor Mohamed was in charge of the central bank’s forex dealing operations at the time.

The RCI proposed that thorough investigations should be carried out by the police, among others, to determine whether Dr Mahathir had condoned the actions of the then Finance Minister Anwar, which led to the central bank incurring losses, and recommended for the duo to be investigated for criminal breach of trust and fraud.

The commission believed that Dr Mahathir “may know more about the real losses which is not without merit”.

The former prime minister, nevertheless, had filed a suit to declare the RCI’s report as null and void because it was illegal, incomplete and defective as the report excluded notes of proceedings and legal documents of witnesses.

As for other developments in the banking industry, BNM together with Bank Indonesia and Bank of Thailand have jointly launched three local currency settlement frameworks which are aimed at promoting the wider use of local currencies, including the ringgit, to facilitate and boost trade and investment in these countries.

BNM had on Dec 14 issued an exposure draft on the invocation of reporting obligations of the digital currency, or cryptocurrency, exchange business under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, a move to make it transparent in Malaysia. — Bernama