The ringgit’s steepest slide since 1998 is evoking memories of the clash between former Malaysian prime minister Mahathir Mohamad and hedge-fund manager George Soros.
The currency slid 3.8 percent against the dollar last week as Malaysian central bank Governor Zeti Akhtar Aziz on Thursday said foreign exchange reserves would to need to be rebuilt after they fell below US$100 billion for the first time since 2010. She ruled out introducing a currency peg or capital controls, the solutions Malaysia turned to 17 years ago when faced with a tumbling exchange rate. Mahathir blamed foreign investors for the demise of the ringgit and labeled Soros a “moron” for his part in it.
“The fallout is reviving memories of hedge-fund attacks in the 1997-’98 crisis,” Bank of America Merrill Lynch economist Hak Bin Chua (蔡學敏) said on Friday in an interview.
“We don’t think capital controls are likely, but cannot rule out the risk given the rapid depletion of foreign reserves,” Chua said.
Malaysia’s currency resumed its decline yesterday and is leading losses in Asia over the past year with a 24 percent drop, battered by a political scandal, a yuan devaluation, slumping oil prices and the prospect of higher US interest rates. That compares with a 30 percent slide in the 12 months before Mahathir imposed capital controls in September 1998 and some investors say the risk of a repeat is fueling an exodus of money from Malaysia.
The ringgit has retreated in each of the past eight weeks and slid 1 percent to 4.1215 per US dollar as of 10:54am in Kuala Lumpur. It earlier fell to a 17-year low of 4.1340. Bank Negara Malaysia declined on Friday to comment on the move and on whether it was intervening in the market.
Malaysia has a “history of draconian policy responses” and that might be spurring the flow of funds from the country as the currency weakens, said Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management Ltd, which oversees about US$112 billion.
Global funds held 32 percent of Malaysian sovereign bonds last month, compared with 17 percent for Thailand, according to the latest available central bank data.
There is “fear in the market that they would impose macro-prudential measures to limit outflows,” said Anthony Chan, Asian sovereign strategist at AllianceBernstein LP, which oversees US$485 billion globally.
The benchmark stock index headed for its lowest close since 2012 yesterday while the yield on 10-year government bonds climbed to an 18-month high.
Overseas investors cut holdings of sovereign and corporate notes by 2.4 percent last month to 206.8 billion ringgit (US$50.2 billion), the least since August 2012, official data showed last week.
“There are similarities to the 1997-1998 crisis,” Aberdeen Asset Management managing director Gerald Ambrose said, who oversees the equivalent of US$3.6 billion in Kuala Lumpur.
“There’s a certain amount of emotions involved, a certain amount of panic but I think not so much from the equity market. The real worry is Malaysian government securities, where foreign ownership levels are much higher,” Ambrose said.
In 1998, Mahathir ignored the advice of the IMF in taking the steps he did to stabilize the ringgit, including a peg of 3.8 to the dollar. The IMF, which called the ringgit peg a “retrograde step” at the time, later acknowledged it was a “stability anchor.”
A 17 percent slide in foreign-exchange reserves this year to US$96.7 billion at the end of last month, suggests the central bank had been intervening to prop up the ringgit, just as Malaysian Prime Minister Najib Razak faces a probe of fund transfers into his personal bank accounts. Political machinations were among the causes of the ringgit’s decline, the prime minister wrote in his blog on Thursday last week.
“I think there is a concerted effort to test Bank Negara Malaysia’s reserves,” Nomura Holdings Inc equities strategist Mixo Das said.
“Sentiment is bad, which is why the central bank needs to break the cycle. Public comments by Zeti or others at BNM would be useful,” Das said.
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