Expectations for Malaysia's economy have deteriorated owing to the
recent crude oil rout, with the FBM KLCI recently registering its lowest level
in 2014 so far. Likewise, the World Bank has revised down its 2015 GDP growth
estimate for Malaysia's economy to 4.7 per cent on expectations of moderate
private consumption, weaker export growth and lower investments in the oil and
gas segment. Concurrently, the slump in crude oil prices also stirred up other
issues in Malaysia aside from the turbulence in the equity market.
Below, we will discuss
further on some of the issues that have arisen from the recent slump in
international oil prices:
1. Ringgit: From RM2.90 to RM3.50 per US
dollar
Malaysian ringgit has
skidded heftily by 7.95 per cent against US dollar since the second half of
2014. On a year-to-date basis, Malaysian ringgit was the second-worst
performing currency among its peers in the Asia region, just behind the
Japanese yen.
With the Bank of Japan's
continued efforts in expanding the nation's monetary base and sending signals
on further stimulus plans, the Japanese en topped the list as the worst
performing currency in Asia. While the Japanese yen's huge depreciation can be
attributable to the local monetary policy measures, the hefty depreciation of
Malaysian ringgit stemmed from the violent swings of crude oil prices. A
weakening ringgit could diminish investors real returns, resulting in a
reduction of real purchasing power.
2. Risk appetite of foreign investors waned
With the rising
expectations of an interest rate hike in the US, foreign investors' appetite
for risk began to subside, leading to a massive pullout of their funds from
Malaysia as evidenced by net portfolio investment outflows in the first nine
months of 2014.
Likewise, capital flight
out from Malaysia hastened with the gradual strengthening of US economy and the
deteriorating outlook regarding Malaysia's economic growth.
More recently, the
Malaysian Industrial Development Finance Bhd reported that foreign investors
have been offloading Malaysian equities in the open market over the past five
weeks, with the latest week registering the fourth highest withdrawal of RM840
million in a week.
3. Higher yields of Malaysia Government Securities (MGS)
While Malaysia
government has been taking measures to reduce its reliance on oil throughout
the past few years, oil-related revenues remain to be a significant
contribution to the nation's income; oil-related revenues accounted for
approximately 32 per cent of the national budget.
With oil-related revenues
making up a substantial portion of the government's coffers, the persistent
drop in oil prices has compounded the risk that the nation might not be able to
achieve its 2015 fiscal deficit target of minus three per cent.
The recent sharp decline
in current account surplus has also spurred investors into widespread fear that
Malaysia might fall into a 'twin deficit' situation. As a result, markets,
especially in the MGS segment, have started to factor in expectations that
Malaysia might not be able to achieve its fiscal objective as outlined in the
Budget 2014.
Owing to the substantial
holdings of foreigners in MGS, Malaysia's financial markets are fairly
susceptible to capital outflows. In fact, Bank Negara Malaysia reported a
decrease in holdings of MGS by foreigners in October 2014, down by RM3.1
billion as compared to the preceding month; further selling by foreign
investors on Malaysia's economic concerns could drive MGS yields higher in the
interim, while also weighing on the ringgit.
