KUALA LUMPUR, Oct 2 — Investors seem to be ignoring Malaysia’s long-term fundamentals, says Kenanga Research.
“Investors are more eager to punish misdeeds and financial markets somewhat eager to see the US Federal Reserve (Fed) use the window of opportunity to end its zero interest rate policy (ZIRP) before its growth momentum fizzles out,” it said in a research note.
In less than two weeks after the US Fed’s decision on September 17 to postpone its policy rate hike, the ringgit fell about 5.6 per cent to 4.4570 to the US dollar and comparatively lower than other regional currencies, including the Australian dollar, Thai baht, Singapore dollar and Indonesian rupiah.
To aggravate the already weakening ringgit, talks of sovereign rating emerged.
Following Brazil’s downgrade to junk-status by Standard & Poor’s, investors turned to credit-default-swaps (CDS), for clues of possible sovereign downgrade.
“Most developing nations, including Malaysia, are facing similar domestic issues that reduced Brazil’s investment-grade rating to junk-plunging commodity prices, weakening fiscal balance, rising debt levels, lack of corporate governance and political instability.
“Rising external factors such as the impact of impending US Fed rate hike and China’s sputtering economic growth further raised concern of more downgrades across emerging markets,” said the research house.
This has prompted CDS investors to punish other emerging markets facing similar challenges, sending implied ratings at least five levels below their official grades.
While Moody’s long-term (LT) sovereign debt rating on Malaysia is A3, CDS traders see it six levels lower at Ba3, based on Moody’s implied-ratings model that tracked CDS prices of 65 borrowers on September 21.
Kenanga Research noted that foreign investors would carefully monitor the country’s fiscal health and determine if the government has the capacity to repay debt and support economic growth.
It said the implementation of the Goods and Services Tax (GST) and savings from subsidy rationalisation are expected to take up the slack from oil and gas contribution, which accounts for about 30 per cent of total revenue.
Hence, the fiscal deficit is expected to be manageable and able to achieve target of 3.2 per cent of gross domestic product (GDP) this year.
Kenanga Research is also revising its year-end ringgit target to 4.48 from 4.18 and the year’s average to around 4.00 against the US dollar as uncertainty is expected to remain elevated in the next three to six months.
On the prospects for 2016, it said the macro visibility remained hazy and assumed that the global and domestic economy would be relatively stable, with the pace of a US Fed rate hike being gradual at one to 1.25 per cent by end-2016.
“Nonetheless, we forecast the US dollar-ringgit to settle around 4.20-4.30 by end of next year, a revision from our previous projection of 3.91,” it added. — Bernama
