20180629-大华银行-Macro+FX_Strategy__Malaysia__Stronger_Fundamentals_Provide_Better_Support_For_The_MYR_6页_468kb

Summary of "Macro+FX Strategy: Malaysia - Stronger Fundamentals Provide Better Support For The MYR"

Core Content

This document provides an analysis of the Malaysian Ringgit (MYR) in the context of global macroeconomic and foreign exchange (FX) trends. It highlights the current stance of the Malaysian government on currency policy and evaluates the economic fundamentals that support the MYR.

Main Points

• Malaysia's Currency Policy:

  • Prime Minister Mahathir has stated that there is no immediate need to peg the MYR, though the option remains under consideration.
  • He indicated that the fair value of the MYR against the USD is 3.80, a level similar to the peg that existed from 1998 to 2005.
  • The current economic environment is deemed less supportive of currency pegging compared to the 1998 crisis.

• Global Risk Aversion and Fund Flows:

  • In a period of heightened global risk aversion, capital flows have been moving away from emerging markets (EMs), affecting Asian currencies.
  • The MYR has moved in line with USD/Asia movements since the May 2018 election, indicating a more flexible and market-driven approach.

• Regional Currency Defense Mechanisms:

  • Asian currencies, including the MYR, are better positioned today due to improved external balances, stronger macroeconomic policies, and floating exchange rates.
  • Regional central banks have substantial foreign reserves (over US$5tr) to defend their currencies against speculative attacks.
  • A network of bilateral swap arrangements ensures liquidity and financial stability.

• Malaysia's Economic Fundamentals:

  • Malaysia has a current account surplus of +3.0% of GDP in 2017 and is expected to widen to +3.4% in 2018, compared to a deficit of -5.5% in 1997.
  • Foreign reserves have increased significantly, reaching US$107.9bn by mid-2018 (vs. US$20bn in 1997-98).
  • Most of Malaysia's external debt is in foreign currency and is hedged, reducing exposure to FX volatility.
  • Over 97% of public debt is denominated in MYR, making it less vulnerable to currency fluctuations.
  • The Ringgit is considered undervalued on a real effective exchange rate (REER) basis and lags behind other regional currencies.

• Macro Policies and Governance:

  • Malaysia's macroeconomic policies have supported growth, with an average GDP expansion of 5% over the last decade.
  • Gross savings are at a healthy level of 29% of GNI.
  • Despite near-term policy uncertainty following the elections, the new PH government has taken steps to improve transparency, accountability, and reduce corruption.
  • Fiscal discipline is emphasized, with efforts to cut expenditure and meet deficit targets.

• FX Outlook:

  • The document reiterates a range trading outlook for USD/MyR at 3.95 for the next four quarters (until 2Q19).
  • Positive fundamentals are expected to support the MYR and insulate it from broader EM volatility.
  • Risks to this outlook include deterioration in the current account balance, FX reserves, or insufficient fiscal consolidation, which could lead to renewed weakness in the MYR.

Key Information

• Current Account Surplus: +3.0% in 2017, expected to widen to +3.4% in 2018.
• Foreign Reserves: US$107.9bn as of mid-June 2018, sufficient to cover 7.5 months of retained imports.
• Foreign Currency Debt: 3% of public debt is in foreign currency, with most external debt hedged.
• Fair Value of MYR: 3.80 against USD, similar to the peg in 1998.
• FX Strategy Outlook: Range trading at 3.95 for USD/MyR over the next four quarters.
• Risks: Deterioration in current account balance, FX reserves, or lack of fiscal consolidation.

Supporting Visuals

• Foreign Reserves and Liquidity: Highlighting the regional war chest of reserves and swap arrangements.
• Current Account Balance: Showing the percentage of GDP for various countries.
• Foreign Currency Debt: Illustrating the percentage of GDP for external debt in different countries.
• REER and MYR Performance: Indicating the undervaluation of the MYR and its performance on a trade-weighted basis.

Recent Publications

• Vietnam: Economic growth slows to 6.8% in Q2 2018.
• RBNZ adopts a slightly dovish tone.
• SGS reports good demand in 20Y auction.
• FX Strategy suggests a cautionary view on the USD/CNY rally.
• Singapore May IP and inflation data released.
• Commodities Strategy notes range trading in Brent Crude Oil due to OPEC compromise.
• China: PBoC cuts targeted reserve requirement ratio.
• Taiwan: CBC likely to remain on hold in 2018.
• BoE tilts towards an August rate rise.

Disclaimer

• The document is for informational purposes only and not an offer or recommendation.
• It does not constitute financial, legal, or tax advice.
• UOB Group may have different views in other reports and may hold positions in the mentioned securities.
• The information is based on assumptions and public data, and actual outcomes may differ.