Will the ringgit remain volatile this year, or can we expect more stability?
The macro fundamentals of both Singapore and Malaysia are strong, but uncertainty remains. With economic growth slowing down, we look at how the Singapore dollar and Malaysian ringgit will perform in 2017.
By Paul Ho
The Johor-Singapore causeway sees heavy traffic every day. Travelling from Johor Bahru to Woodlands and vice versa can sometimes take up to three hours.
The congestion is contributed to some extent by the strong Singapore dollar versus the Malaysian ringgit, which has resulted in a few hundred thousand Malaysians commuting to work in Singapore to take advantage of our stronger currency.
How will the ringgit perform against the Sing dollar?
The performance of the two currencies is very much influenced by each country’s monetary and fiscal policies, such as the GDP growth rate, budget, foreign reserves, debt level and confidence.
Factors that affect capital flows could hugely impact a country’s short-term currency position, as they distort the supply and demand of its currency.
Each country’s policymaker will have three policy levers to manage:
– Exchange rate
– Capital control and funds movement
– Money supply and interest rates
No country can maintain all three levels of control.
Singapore’s monetary policy stance
The Monetary Authority of Singapore (MAS) focuses on maintaining price stability to facilitate economic development.
Trade dependent countries such as Singapore do not control interest rates to manage inflation, as changes in the exchange rate have a more direct impact on domestic inflation since most of our goods are imported.
In April 2016, the MAS adopted a neutral policy stance on currency appreciation against those of its major trading partners. This means that on an aggregate basis, it will intervene to maintain the currency within a certain band, such that it neither appreciates or depreciates against a trade-weighted basket of currencies. However, it will still depreciate against some currencies while appreciating against others.
Malaysia’s monetary policy stance
The Malaysian central bank, Bank Negara, has focused more on managing interest rates for domestic economic growth and price stability. Bank Negara also enacted capital controls in 2016 to restrict banks operating in Malaysia from trading on the offshore non-deliverable forward (NDF) market. Currency trading and hedging is only allowed on the onshore market.
A look at the fundamentals
Malaysia’s currency exchange rate is no longer pegged, and is allowed to float within the onshore market.
Meanwhile, the economies of Malaysia and Singapore are slowing down. Unemployment is rising, but Malaysia still recorded a decent GDP growth rate of 4.5 percent. Both countries run healthy trade surpluses and hold considerable foreign exchange reserves, and are able to smooth out currency fluctuations.
Malaysia’s economic fundamentals are quite strong, with some danger from high household debt. This is currently manageable with the low default rate.
Singapore is Malaysia’s largest export market, accounting for 14 percent of its exports. Malaysia, on the other hand, is Singapore’s third largest export market. However, there is little likelihood of either country intervening in currency exchange for trade or competitive purposes, as many intermediate goods flow through Malaysia and Singapore, ending up as finished products.
There isn’t much likelihood of the Singapore dollar facing speculative attacks in the near term, as fundamentals look strong. While Malaysia’s fundamentals are also strong, it has seen some political unrest and suffers from an image problem. Speculators are searching for any weaknesses. Short-term capital outflow could cause the ringgit to weaken.
At the same time, the international media has been quick to ridicule Malaysia’s need for self-determination and partial currency controls, such as restricting the NDF, claiming that it restricts their ability to hedge their Malaysian investment exposure, and complaining that the onshore NDF is not sufficiently liquid.
The solution for liquidity in Malaysia is to create a market maker in the onshore marketplace, and not to review the offshore NDF market, which is essentially an “offshore betting house” for speculators to short the ringgit.
Malaysia has government bonds, namely the Malaysian Government Securities (MGS) and Government Investment Issue (GII) maturing in 2017. Foreign holders of Malaysian bonds will exert downward pressure on the currency as this capital may exit the ringgit market.
There is approximately RM67 billion of bonds maturing, with foreigners holding about 45 to 50 percent of MGS and GII. This works out to about RM30 billion of potential outflow should they all exit the ringgit market. However, as uncertainty looms, the Malaysian government will need to increase the yields to make Malaysian bonds attractive to foreigners, hence, many investors may decide to purchase the new issuance. As a result, capital outflow would likely be mitigated.
A slight weakness in the ringgit is expected during periods of bond maturity. However, stability should return after the bond market matures. The ringgit could weaken slightly against the Singapore dollar in the early part of 2017, but is likely to stabilise towards the end of the year. Continued strength in the Singapore dollar ensures that the city-state remains a source of funds for investment in the region.
Paul Ho is the founder of www.iCompareLoan.com