Malaysia's Ringgit May Weaken to 3.8 Dollar-Peg Level

By David Yong

Sept. 12 (Bloomberg) -- Malaysia's ringgit may weaken by year-end to a level when it was pegged at 3.8 to the dollar, should the central bank desist from intervening, according to Moody's Economy.com Inc.

Global financial turmoil and a domestic power struggle may spur capital flight from the Southeast Asian economy, while a plunge in prices of commodities the country exports, including crude oil and palm oil, will put pressure on the currency to depreciate, Sydney-based economist Nikhilesh Bhattacharyya said in a phone interview. The ringgit is Southeast Asia's second- worst performer in the past three months.

``Some politicians might put some pressure on the central bank and there's always a chance they would intervene in the market,'' he said. ``But if they don't, I see the ringgit depreciating quite a bit from here. I don't see much cause for optimism in the near term.''

The ringgit rose 0.4 percent to 3.4571 per dollar as of 1:22 p.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency may reach 3.6 by September-end and 3.8 by the end of the year, Bhattacharyya forecast. Moody's Economy.com is a unit independent of Moody's Investors Service Inc. and doesn't influence its credit rating process, he said.

Former Prime Minister Mahathir Mohamad fixed the ringgit at 3.8 per dollar in September 1998, among capital control measures aimed at stemming outflows during the Asian financial crisis. His successor Abdullah Ahmad Badawi scrapped the dollar link in July 2005, within an hour of China's decision to remove its decade-old link to the U.S. currency.

Declining Reserves

Bank Negara Malaysia's foreign-exchange reserves have dropped $3.2 billion to $122.6 billion as of Aug. 29 since peaking in June. The central bank's dollar sales have increased, according to HSBC Holdings Plc.

``Malaysia has built a sizeable war-chest of reserves,'' strategists, including Hong Kong-based Daniel Hui, at Europe's biggest lender by market value wrote in a research note today. ``Pressure on the regime to curb depreciation remains moderate and rising.''

Central banks intervene in currency markets by arranging sales or purchase of foreign exchange.

The ringgit has dropped 1.8 percent since Aug. 29, when Abdullah unveiled a revised budget for 2008, showing a deficit that will widen to a five-year high of 4.8 percent of gross domestic product, from 3.2 percent in 2007. Economic growth will slow to 5.7 percent from 6.3 percent last year, according to government forecasts.

Commodity Prices

The premier, locked in a power struggle with Opposition Leader Anwar Ibrahim, is counting on oil prices to average $125 a barrel in 2009, unchanged from 2008, to lift revenue and narrow the budget deficit.

Oil traded at $101.55 a barrel, 31 percent lower from a record $147.27 set on July 11. Palm oil prices have slumped 44 percent from their peak in March, according to Bloomberg data. Malaysia is the world's second-largest exporter of the cooking oil. Both the commodities accounted for 14.5 percent of the nation's exports in the first half of the year.

``Commodity prices are expected to continue to fall,'' Bhattacharyya said. ``Political fallout will unnerve investors. Add to this potential for the budget deficit to blow out further, there seems little chance that the ringgit will strengthen any time soon.''

Abdullah on Sept. 5 said it wasn't yet time to intervene as the currency's decline ``has not reached a worrying level.'' Deputy Finance Minister Ahmad Husni Hanadzlah on Sept. 10 said the currency level is manageable.

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