Ringgit to hit 4.20 against dollar by year-end, says BMI Research

The ringgit will hit 4.2 against the US dollar by the end of the year, says BMI Research (a Fitch Group company) in its outlook for Malaysia published today, despite its upgrade of the country’s gross domestic product (GDP) to 4.7%. 

The research house said its original forecast of RM3.7 to the US dollar by year-end was no longer applicable. 

It cited the "headwinds" the country’s economy was facing, including lower oil prices; the slowing of China’s economic growth; the strength of the US dollar; and political uncertainty. 

"With these headwinds unlikely to abate over the coming quarters, we have revised our forecast for the ringgit to end 2015 at MYR4.2000/US$ and average MYR4.000/US$, versus a year-end and average forecast of MYR3.7000/US$ previously," said BMI. 

The ringgit breached its 17-year low figure of 3.9365 against the US dollar last week, and is now trading at levels of 4.0945, according to Bloomberg. 

However, BMI said today it upgraded its 2015 GDP forecast for Malaysia by 0.5% because the country performed better than expected for the first half of the year (H115). 

BMI said the H115 real GDP figures were high because Malaysia's economy had yet to feel the effects of lower oil prices, weakening exports and the goods and services tax. 

In its analysis of growth figures in the second quarter (Q215), BMI said manufacturing grew by 4.2% year-on-year, slowing from the 5.5% recorded in the previous quarter. 

It said services recorded slower growth at 5% year-on-year compared with 7.3% in the first quarter, while the mining and quarrying sectors decelerated to 6% year-on-year versus 9.6% previously. 

BMI said the Q215 growth figures "indicate resilience" and came in higher than estimated, at 4.9% instead of 4.5%. 

"That said, we expect the Malaysian economy to exhibit a continued slowdown into 2016 as the impact of the exports slowdown, lower oil prices, GST, political instability, and a weakening currency undermine economic growth," said BMI. 

It said China's economic slowdown over the coming years would affect Malaysia, given its status as Malaysia's largest trade partner, while lower oil prices continued to exert negative impact. 

BMI said ongoing political instability further undermined investor confidence in Malaysia’s economy, leading to a sell-off of bonds and aggravating currency weakness. 

"The ongoing power struggle in ruling Umno and the failure to provide adequate answers regarding the 1Malaysia Development Bhd (1MDB) scandal have led to a rise in civil discontent, which will weigh on near-term social stability. 

"Continued political turmoil has also resulted in a gradual erosion of short-term investor confidence, and we expect this to continue as the business environment continues to be plagued with uncertainty in the light of possible social instability.

" BMI said the credit default swap (CDS) market has begun to price in an increasing yet minor possibility that Malaysia will default, and is five-year CDS is now trading outside of Thailand. – August 19, 2015.

Source - malaysiainsider