RBS Lowers Ringgit Forecasts on Exports, Political `Headwinds'

By David Yong

Aug. 25 (Bloomberg) -- Malaysia's ringgit may post losses this year and next as falling commodity prices weigh on the country's economic growth, according to Royal Bank of Scotland Group Plc.

Malaysia's exports are losing support from crude and palm oil prices whose gains had shielded the economy from a slump in U.S. demand for its semiconductor chips, Singapore-based economist Sanjay Mathur wrote in an Aug. 22 research note. The central bank's policy of keeping interest rates unchanged and political turmoil may also weaken the currency, he said.

``The ringgit faces headwinds from falling commodity prices, rising competition and an accommodating monetary policy,'' Mathur said in the report. ``It's a combination of events and things are happening simultaneously,'' he said in an interview today.

RBS, the U.K.'s second-biggest bank, lowered its ringgit forecast for 2008 to 3.37 per U.S. dollar from 3.33. The currency traded at 3.3665 as of 10 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. The prediction from RBS is more bearish than the median estimate of 3.23 among 19 finance companies in a Bloomberg News survey. The bank said the currency will weaken to 3.5 by end-2009 versus an old forecast of 3.20.

Malaysia is the world's second-largest palm oil exporter and the second-biggest oil producer in Southeast Asia. Prices for crude have dropped 18 percent since June 30 and those for palm oil 23 percent. The commodities accounted for 14.5 percent of overseas shipments in the first half of the year, according to data published by the trade ministry.

``Malaysia has lost market share to China,'' Mathur wrote in the report. ``Now that commodity prices are easing, the influence of the global business cycle and competitiveness of exports will become more apparent.''

Central Bank Rate

The ringgit dropped 0.7 percent to 3.3660 today, its biggest loss in more than three months and its weakest level since November, before the central bank meets on interest rates.

Bank Negara Malaysia on July 25 kept its overnight policy rate at 3.5 percent, unchanged in 18 straight meetings since April 2006, citing risks to slowing economic growth and unemployment. RBS expects no-change today, Mathur said.

The ringgit has weakened 4.4 percent in the past three months. Only the Thai baht and Philippine peso fared worse among Asia's 10 most-traded currencies.

Demand for the currency may also wane as opposition leader Anwar Ibrahim seeks to re-enter parliament in a by-election in northern Penang state tomorrow. The former deputy prime minister said on Aug. 8 that lawmakers from the ruling Barisan Nasional coalition may announce their defections to the opposition camp as early Aug. 27, weakening the ruling National Front coalition.

Politics, Anwar

An Anwar victory tomorrow may raise the possibility of defection to the opposition camp, while Prime Minister Abdullah Ahmad Badawi could be challenged as UMNO president at an internal party election in November, according to the RBS report.

``This situation suggests that economic issues are unlikely to be a focus area for the Barisan Nasional in the coming months,'' RBS said. ``The political turmoil will continue to weigh on the ringgit.''

Economic growth slowed to 6 percent in the second quarter from 7.1 percent in the preceding three months, according to a Bloomberg survey before a central bank report on Aug. 29. The finance ministry will present the 2009 budget in parliament on Aug. 29, which may include new forecasts for growth and inflation for 2008 and 2009.

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