The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
If you look at the last six months, you will see that the Ringgit (RM) has been the second worst performing currency in Asia, after the yen.
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| Ringgit (RM) crisis |
Two weeks ago, it breached the 3.4 level against the USD. On Dec 5th, it touched 3.4757 before closing at 3.4713.
From the Ringgit's year high of 3.1463 recorded on August 27, the Ringgit has lost 10.3% of its value against the greenback. Last week alone there is a decline of 2.6%.
While the yen's fall is due to the deliberate policy move by the Bank of Japan to devalue its currency, the ringgit is a victim of a convergence of several factors on both the external and domestic fronts.
The big question mark that remains: is the currency weakness a reflection of Malaysia's economic's fundamentals or is it a cyclical and temporary weakness?
If you trust the analysts, then Ringgit is expected to continue the downtrend into next year.
Factors that drive the Ringgit down
Drop in Oil Price
We all know the sharp depreciation of the local currency is mainly affected by the oil prices. In this region, Malaysia is the only country that is negatively impacted by this as Malaysia is a net energy exporter while others are mainly importers.
It is normal for the currencies of net energy exporter to suffer as the oil price drop. The Malaysia Ringgit also has the highest correlation to crude oil price movements. Correlation statistics show that crude oil price is currently the most important driving factor of ringgit price movements so it's easy to expect the downtrend to continue.
US Federal Reserve's QE end
During the US Federal Reserve's quantitative easing era, the foreign inflow into ringgit is based on the attractiveness of both carry and currency returns.
As the broad US Dollar turns positive and the prospect for the ringgit deteriorate, the risk of foreign debt outflow from Malaysia has risen as well.
Fall in commodity prices
While the drop in oil price is an important factor that drive Ringgit down, the bigger story is the drop in commodity's prices (crude palm oil) and its impact on the country's trade and fiscal balance.
Correction in the Equity market
Whoever invested in the oil & gas stock market would definitely feel the pain.
In fact, Bursa Malaysia is one of the worst performers in the region this year, falling 2.4% year to date. In the last three months alone, there is a total outflow of RM2.3 billion while outflow year to date is amounted to RM4 billion.
High foreign ownership of Malaysian bonds and expectation of interest rate increase in US in the second half of 2015.
Well, there are other factors that could lead to this....so how low can Ringgit go? It's difficult to forecast accurately but projections are ranging from 3.5 to 3.6 against the US Dollar in the next year.
The magnitude of the drop is definitely correlated to how much lower commodity prices will fall and whether the market sees a big outflow of foreign funds from bonds and equities. The bigger concern now is on the huge foreign holding of Malaysia bonds. As at October 31st, foreign investors held RM250 billion of Malaysian debt and 45.9% of total Malaysian government securities. And when they do decide to get out, the impact could hit the financial market pretty hard.
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