The Malaysian ringgit’s rally this year is facing political risks as a scandal surrounding Prime Minister Najib Razak and state investment company 1Malaysia Development Bhd. refuses to blow over.
The currency tracked a rebound in oil to rally 4.8% to 4.0957 a dollar in 2016, second only to Indonesia’s rupiah among Asia’s emerging markets. National Australia Bank Ltd said rising political risk hasn’t been fully priced in, gauges of expected volatility are ticking higher and strategists forecast a 5.8% depreciation by year-end.
Former premier Mahathir Mohamad resigned from the ruling party last week, claiming it had been “hijacked” by Najib, while a central bank warning that the government-linked Hajj fund’s liabilities exceed assets threatens to upset his rural support base. Swiss prosecutors said in January there were indications about US$4 billion may have been misappropriated from Malaysian state-linked companies and this week people familiar said a former Goldman Sachs Group Inc banker has been subpoenaed in a U.S. probe connected to Malaysia.
“The recent developments have intensified the risks of severe divisions within the ruling party and this could impact the market’s confidence,” said Julian Wee, a senior markets strategist at National Australia in Singapore. “The potential for more 1MDB-related revelations from the investigations in other jurisdictions” is also weighing on ringgit, he said.
Wrongdoing Denied
Malaysia’s Attorney General Mohamed Apandi Ali cleared Najib in January over a US$681 million donation from Saudi Arabia’s royal family and an unspecified amount from a company linked to 1MDB that appeared in his personal bank accounts. The office of the premier, who chairs the investment company’s advisory board, didn’t immediately respond to an e-mail on Thursday seeking comment on the more recent developments.
Both the premier and 1MDB have consistently denied any wrongdoing. Goldman has declined to comment on the U.S. probe, while Lembaga Tabung Haji, a statutory agency under the Prime Minister’s Department, has rebutted concerns over its liabilities.
The ringgit will weaken to 4.4 a dollar by the end of the year, said NAB’s Wee, a depreciation of 6.9% from Friday’s level. That compares with the median estimate in a Bloomberg survey of analysts for a drop to 4.35. Australia & New Zealand Banking Group Ltd is more pessimistic, seeing an 8.6% decline to 4.48.
“While the market has largely brushed off the recent political news surrounding Prime Minister Najib and the offshore investigations into 1MDB, those concerns could yet return should there be new twists to the saga,” said Khoon Goh, a Singapore- based senior strategist at ANZ, the top forecaster of emerging-market Asian currencies in Bloomberg rankings in the last four quarters. He said his forecast is “based on the Federal Reserve hiking more than the market is expecting and oil prices remaining low.”
Investors are also waiting to see who will be chosen to replace central bank Governor Zeti Akhtar Aziz, whose term ends next month. Zeti clashed with the Attorney General on probes into 1MDB, and said the funding scandal involving the premier and alleged financial irregularities in the state investment company, had hurt confidence in the country. Najib has given no indication on who will succeed her.
The market will want to ensure the new governor can ensure the monetary authority’s independence, said Qi Gao, an currency strategist at Scotiabank in Hong Kong. He sees the ringgit declining to 4.42 by year-end.
Mahathir Alliance
After months of urging Najib to step down over his handling of the economy, Mahathir upped the ante by forming an alliance with opposition and civil society groups. Malaysia’s longest- serving premier has repeatedly warned the ruling party could lose the next election, which must be held by 2018, if Najib stays on.
Investors have become inured to Malaysia’s political developments, which are unlikely to weaken the ringgit, according to Macquarie Bank Ltd, the top forecaster of the currency in the last four quarters in Bloomberg rankings.
“The market thinks that the height of the political risk may have passed, despite the latest developments,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie in Singapore. “I don’t know how this alliance can be effective in ousting the prime minister, who has proven to be very adept at outmaneuvering his political foes.”
In addition to the Swiss and U.S. probes, Singaporean authorities are also investigating 1MDB. The city-state said last month it had seized a “large number” of bank accounts in connection with possible money-laundering carried out in Singapore in relation to the state investment company.
The ringgit plunged 19% in 2015 as the 1MDB scandal, falling oil prices and the prospect of higher U.S. interest rates spurred outflows. One-month implied volatility, a measure of expected swings used to price options, has risen 120 basis points to 13.22% in 2016.
“The ringgit doesn’t have much of a political risk premium built in,” said Sue Trinh, Hong Kong-based head of Asia foreign-exchange strategy at Royal Bank of Canada. “If noise on that front does gain traction the risk for Malaysia is going to be to the downside.” - theedgemarkets
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