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Monday, August 17, 2015

History of ‘draconian’ measures affecting ringgit

Most analysts polled rule out a return to the 1998 pegging as unlikely although the fears persist and hurt sentiments.
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KUALA LUMPUR: An economist at the Bank of America Merrill Lynch in Singapore does not rule out the risk of capital controls given the rapid depletion of Bank Negara’s foreign reserves. “However, it’s unlikely,” conceded Chua Hak Bin in an interview with Bloomberg News. “Still, there are memories of the hedge fund-attacks on the ringgit during the 1997/98 Asian Currency Crisis.”
Alan Richardson, a Hong Kong based money manager at Samsung Asset Management Ltd which oversees USD112 billion in assets, thinks that what’s spurring the current capital outflow are memories of Malaysia’s “history of draconian policy responses”.
Anthony Chan, Asian sovereign strategist at AllianceBernstein LP which oversees USD485 billion globally, chipped in that “there’s fear in the market that they would impose macro-prudential measures to limit outflows”.
The ringgit – hovering at RM4+ to USD1 — has declined 24 per cent, a 17-year low, over the past year compared with the 30 per cent in the 12 months before 1998 when then Prime Minister and Finance Minister Mahathir Mohamad introduced capital account controls or pegging the currency against the USD, RM3.80 to USD1 compared with RM4.80 to USD1 before controls were introduced. The International Monetary Fund (IMF) blasted the move but subsequently changed its mind and described it as a “stability anchor” when the ringgit no longer suffered from extreme volatility.
Aside from the risk of a repeat of pegging, other factors fueling the exodus from ringgit are a political scandal which has hurt sentiments, low crude oil and commodity prices, the recent devaluation of the yuan, and the prospect of higher interest rates in the US.
There are memories of 1997/1998, added Gerald Ambrose who oversees USD3.6 billion in assets as managing director of the Kuala Lumpur-based Aberdeen Asset Management Sdn Bhd. “There’s some panic but not at the stock market. Emotions are involved. The real worry is the Malaysian Government securities where foreign ownership is higher.”
Mixo Das, an equities strategist at Nomura Holdings Inc in Singapore, believes that there is a concerted effort in the market to test Bank Negara’s reserves, already down from USD140 billion to below USD100 billion for the first time since 2010. “Sentiment is bad. The central bank needs to break the cycle. Bank Negara Governor Zeti Akhtar Aziz and others need to assure the market.”
The ringgit slid 3.8 per cent against the USD after Zeti said last week that the central bank reserves need to be rebuilt but ruled out capital account controls, or pegging the ringgit to the USD, as introduced in 1998. She did not say whether the central bank was intervening in the market or would continue to intervene.

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