MIDF Research maintains ringgit forecast despite Fitch downgrade

PETALING JAYA: MIDF Research is maintaining its year-end forecast for the ringgit at 3.95 against the greenback despite the downgrade of the Malaysian sovereign bond by Fitch Ratings last week.
The ringgit strengthened 0.58% to 4.0555 against the US dollar as at 5pm yesterday.
The research house explained there are other factors play bigger roles in determining the currency future movement.
Fitch downgraded Malaysia's government long-term local bond rating to "A-" from "A" last week, due to the absence of strong public finance fundamentals against external finance fundamental and the preferential treatment of local-currency creditors against the foreign-currency ones.
"We believe the latter should not be much of a consideration given the fact most of the government bond issuance were ringgit denominated," said MIDF Research.
Logically, it said a revision in credit rating usually has an eventual material impact to the exchange rate via change in fund flows to the respective country.
"A lower credit rating would imply higher yield and could affect fund flow as investors and institutions rebalance their portfolio accordingly," it explained.
MIDF Research said while the downgrade should weigh on the ringgit and 10-year bond yield, the market was seemingly not reflecting such concern.
"Case in point, Philippines and Thailand holds lower credit rating than Malaysia but have lower 10-year sovereign bond yield," it said.
Even though Malaysia is perceived as heavily reliant on commodities, MIDF Research said the country's fiscal is less dependent on oil related revenues.
"According to our estimate, oil related revenues will contribute about 11.9% to 12.6% to the total federal revenue with oil prices projected at average of US$30 to US$35 per barrel respectively,"it noted.
On Wednesday, Fitch also downgraded Petronas' long term foreign credit rating and local currency issuer default ratings to "A-" from "A", with a stable outlook.