HSBC Cuts Outlook for Malaysia Ringgit, Says No Gain Until 2010

By David Yong

Aug. 19 (Bloomberg) -- Malaysia's ringgit won't strengthen until at least 2010 because falling commodity prices and rising political tension will damp demand for the currency, according to HSBC Holdings Plc.

The London-based bank, Europe's biggest, said the currency will weaken to 3.5 per dollar at the end of this year, revising a prediction of 3.28, strategist Daniel Hui wrote in a research note yesterday. HSBC said the ringgit will remain around that level throughout 2009, changing its call for a gain to 3.05.

``Deterioration across several fronts leads us to believe that an unfavorable fundamental backdrop will be much protracted,'' Hong Kong-based Hui said. ``All the conditions that helped drive capital inflows in the first quarter have now vanished,'' wrote Hui, who confirmed the report yesterday.

HSBC in June turned ``neutral'' on the ringgit as consumer prices surged by the most in 26 years and police started investigating the leader of the opposition for illegal sex.

Crude oil has fallen 23 percent and palm oil 45 percent from their record levels this year. Both commodities accounted for 14.5 percent of Malaysia's exports in the first half, according to data published by the trade ministry. Malaysia is the world's second-largest palm oil exporter and the second- biggest oil producer in Southeast Asia.

``Falling commodity prices will be a net negative for the trade account, national income and the fiscal balance,'' Hui said in the report.

Political Turmoil

The ringgit traded at 3.3365 per dollar as of 8:39 a.m. in Kuala Lumpur, compared with 3.3340 yesterday, according to data compiled by Bloomberg. The ringgit fell 1.4 percent last week, its biggest loss since the five days ended Nov. 16.

The currency will reach 3.3250 in a year, according to non- deliverable forwards contracts, compared with bets for a gain to 3.2620 two weeks ago. Forwards are agreements in which assets are bought and sold at current prices for future delivery.

Demand for the ringgit is limited as opposition leader Anwar Ibrahim faces a Sept. 10 trial after pleading not guilty to illegal sex with a former male aide. Anwar seeks to re-enter parliament in a by-election in northern Penang state on Aug. 26 and has said the accusations are a ploy to derail his comeback.

Anwar, the former deputy prime minister, said on Aug. 8 lawmakers from the ruling National Front coalition may announce their defections to the opposition camp as early Aug. 27 to topple the government.

Fund Outflows

``Political developments in the past few months have worsened the environment and made the outlook even more uncertain,'' HSBC's Hui said. ``The probability of a decisive end-game is declining, while prospects for protracted instability are becoming more real.''

Malaysia's weakening currency and relatively low yields may cause foreign investors to liquidate their holdings of local debt, HSBC said. Global funds owned about 30 percent of Malaysia's government bonds, of which almost half is concentrated in the short-term bills, Hui said.

Bank Negara's decision to hold its overnight policy rate unchanged at 3.5 percent since April 2006 made it the region's least responsive central bank, raising serious questions about its credibility and independence, HSBC also said.

Inflation quickened 7.8 percent in July after reaching a 26-year high of 7.7 percent in June, according to the median forecast in a Bloomberg News survey of 19 economists before the government releases the latest figures on Aug. 22.

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