The US Treasury’s decision to include Malaysia in the Monitoring List of Potential Currency Manipulator will likely weigh on the ringgit in the short to medium term. — Reuters photo
KUCHING: The US Treasury’s decision to include Malaysia in the Monitoring List of Potential Currency Manipulator will likely weigh on the ringgit in the short to medium term.
The decision hastens the US dollar-ringgit to reach a six-month low of 4.20 after months lingering in the 4.00 to 4.19 range. Notably, the ringgit has depreciated by about two per cent against the US dollar since it passed the 4.10-mark on April 10.
According to the economics team at Kenanga Investment Bank Bhd (Kenanga Research), the move has compounded the impact brought about by the decision to potentially exclude Malaysia from the FTSE Russell World Government Bond Index announced last month.
“The much-anticipated decision came as no big surprise as the US, under Donald Trump’s presidency, is determined to exert its protectionist stance on trade,” it said following the move.
“Furthermore, Trump has been using the foreign-exchange policy as a tool to rewrite global trade rules in the pretext of protecting US businesses and jobs in a bid to win support for his re-election in 2020.
“The US, however, spared China the currency manipulator label but it remains in the watch list. This may have been to avoid further escalation in the on-going protracted US-China trade negotiation.”
In the semi-annual foreign-exchange report to Congress, the US Department of Treasury Office of International Affairs expanded the potential currency manipulator to nine from five while none was named a manipulator.
No major trading partners were labelled a manipulator since 1994.
Malaysia is among the five new entrants, including Ireland, Italy, Vietnam and Singapore. The incumbents were China, Japan, South Korea and Germany while India and Switzerland were removed.
The rise in the number of countries in the list mainly reflects the Treasury Secretary Steven Mnuchin’s decision to expand the number of major trading partners covered in the report, as well as to revise thresholds for the three eligibility criteria.
Of note, a minimum of two of the three criteria has to be met in order for a country to be included into the list. A country will remain on the list for a minimum of two consecutive reports, before it stands the chance to be removed, in ensuring sustained improvement in performance with regards to the said criteria.
As extracted from the official report, Malaysia met two of the three criteria, specifically a goods surplus exceeding US$20 billion (Malaysia stands at USD$26.5 billion) and a current account balance surpassing two per cent of GDP (Malaysia: 2.1 per cent), rendering its inclusion into the Monitoring List.
“Of significance, technically, Malaysia was not perceived as a currency manipulator, premising on the fact that though BNM intervened in the currency market, it was executed in a two-sided manner, curbing both appreciatory and depreciatory pressures to the ringgit, as opposed to a persistent one-sided intervention, an act heavily detested by the US.
“With net sales of foreign exchange amounting to 3.1 per cent of GDP in 2018, Malaysia did not meet the criteria of having net foreign exchange purchases of two per cent of GDP.”
In response to US Treasury’s decision, Bank Negara stressed that it “does not practice unfair currency practices.”
Though it somewhat admitted the part on intervention in the forex market, BNM, however, explained that it has been in both directions over the last few years, concurring the US Treasury report, and “is limited to ensuring an orderly market and avoiding excessive volatility”.
“While there is a chance that Malaysia might be taken off the list in a year or so, it still needs to contend with the unfavourable perception of investors in the next three to six months,” Kenanga Research observed.
“Coupled with the uncertainty over the impact of the protracted US-China trade negotiation as well as an increasingly dovish US Federal Reserve, we expect the US dollar-ringgit to hover between 4.15 and 4.25 in the short term.