1MDB woes hastened ringgit's fall: Analyst

PETALING JAYA: The debt issues and controversies surrounding sovereign investment company 1Malaysia Development Bhd (1MDB) are doing more damage to the ringgit than the strengthening of the US dollar, says analyst and foreign exchange traders.
The ringgit flattened to a nine-year low against the dollar on Monday with the local currency extending beyond 3.76 to the greenback after US non-farm payrolls (NFP) data beat forecasts and heightened the case for the Federal Reserve to start tightening monetary policy.
"Although the NFP outcome and the resumption of US dollar appetite among traders would have pressured the ringgit, it is the reports of a scandal at a Malaysian state-backed fund that have accelerated the decline in the currency," said Jameel Ahmad, chief market analyst at FXTM, an international forex broker.
He said the ringgit was already facing pressure due to the resumption of US dollar demand and confirmation that oil prices are set to stay lower for longer, "but this is the last thing the ringgit needs now and will make the currency extremely vulnerable to sudden declines."
Jameel said that when investors learn about such possible scandals, it makes any economy vulnerable to a sudden outflow of capital and it is even more the case in emerging markets.
"Therefore, after strengthening at the beginning of second quarter when the dollar was vulnerable to profit-taking, it is now the ringgit that is exposed to a really painful conclusion to the second quarter.
"While the Malaysian economy is actually performing okay, it is these type of concerns that are going to encourage investors to pull money away from investing in Malaysia," he explained.
He also opined that Bank Negara Malaysia (BNM) is unlikely to raise interest rates to prevent any further currency weakness.
"It is more likely that the BNM will change its monetary stance and decrease interest rates later in the year," he added.
MIDF Research in a note yesterday believed that 1MDB will have no problem settling its incoming debt settlements so long as it is able to liquidate its assets.
However, it added that the main problem lies with 1MDB's strategy on liquidating its assets, as currently any relationship with 1MDB will lead to a negative perception by the market despite the deal was beneficial to both parties.
"We are keeping close watch on 1MDB developments as they mostly affect investment decisions of retail investors," MIDF said.
Meanwhile, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz in the central bank's official Facebook page said that the ringgit's depreciation is only "temporary" and not reflective of the country's economic fundamentals.
"Ringgit's depreciation is temporary - RM's fall to level seen during the Asian financial crisis is not reflective of Malaysia's economic fundamentals and the depreciation is expected to be short term," she said yesterday.
Zeti added that the exchange rate is not an instrument of monetary policy nor a tool to gain competitiveness.
Last week, second finance minister Datuk Seri Ahmad Husni Hanadzlah said that Malaysia could face rating downgrades if 1MDB's debt issue is not solved.
He warned that the ringgit could fall to Asian crisis levels when it had risen above RM4 to the dollar.
The ringgit recovered some of its losses against the dollar in mixed trading yesterday as investors took profit from the recent decline. The local note closed at 3.7520/40 to the dollar, trading between 3.7460 and 3.7650.
Meanwhile, Malaysia government bonds advanced in fairly active trade yesterday, with benchmark yields closed the day 1-7bps lower across the curve from previous closing.
"Debt prices recovered from some of the losses as some investors saw recent sell-off as overdone," a forex trader told SunBiz.