Citigroup Cuts Forecast for Ringgit on Commodities, Politics

By David Yong

Aug. 11 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, lowered its year-end forecast for Malaysia's ringgit because a decline in commodity exports may reduce the current- account balance as political turmoil persists.

The ringgit fell, extending last week's 1.2 percent drop, the steepest in almost nine months, on speculation a decrease in crude and palm oil prices will erode the nation's export receipts. Singapore, which surpassed the U.S. as Malaysia's biggest overseas market this year, cut its economic growth estimate last week as exports slumped.

``Concerns over growth, inflation and political uncertainties'' have already led foreigners to sell their holdings of Malaysian debt securities,'' economist Kit Wei Zheng wrote in a research note on Aug. 8. ```The recent fall in commodity prices has also taken part of the shine off the ringgit appreciation story.''

The ringgit declined 0.7 percent to 3.3245 per dollar as of 2:55 p.m. in Kuala Lumpur, the weakest since Dec. 28, according to data compiled by Bloomberg. The currency will reach 3.3152 in 12 months, according to non-deliverable forwards contracts, compared with bets for an advance to 3.2520 a week ago.

Forwards are agreements in which assets are bought and sold at current prices for future delivery.

Citigroup trimmed the currency's end-2008 forecast to 3.33 per U.S. dollar, Singapore-based Kit confirmed in a telephone interview today. The bank now expects its old target of 3.28 to be achieved by the end of 2009.

The bank's ringgit revision followed its decision to trim the Singapore dollar forecast to S$1.42 from S$1.36 for end-2008, Kit said. The ringgit weakness may continue into June next year as long as concerns over the economy and politics persist, he said.

Current Account

Crude oil has fallen 17 percent since the end of June and palm oil 23 percent. Both commodities accounted for 14.5 percent of Malaysia's exports in the first half, according to the trade ministry. Malaysia is the world's second-largest palm oil exporter and the second-biggest oil producer in Southeast Asia.

``Net exports of palm oil and crude oil together account for nearly 60 percent of Malaysia's current-account surplus,'' Kit said in the report. ``Any drop in prices would have a material impact on the current-account position.''

Investors have sold local bonds as opposition leader Anwar Ibrahim faces a trial on sodomy allegations on Sept. 10 and kept his Sept. 16 deadline for toppling the ruling government. Anwar pleaded not guilty to the charge, saying it was a ploy to derail his political comeback.

Singapore's dollar fell to a five-month low after the island-state government cut its 2008 forecasts for exports and gross domestic product.

The Monetary Authority of Singapore's willingness to allow the local dollar to weaken from the upper limits of its band may represent ``a de-facto easing of policy without actually making an announcement to this effect,'' Citigroup said.

The weakness in the Singapore dollar, which makes up the second-largest weight in Malaysia's currency basket, will drag the ringgit down as well, the bank said.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.