Ringgit expected to rally; Political uncertainty bolsters the currency in face of inflation
By DAVID ROMAN, THE WALL STREET JOURNAL ASIA
May 29, 2008

SINGAPORE -- Political uncertainty isn't usually good for a currency, but it's helping the ringgit since Malaysia has few alternatives to using the ringgit to curb inflation.

So as inflation pressures mount, the ringgit is poised for a sustained rally on the dollar. Economists said the dollar, now around 3.24 ringgit, could test three ringgit this year.

In midday trading in New York, the dollar was down at 3.24 ringgit from 3.2415 ringgit late Tuesday.

"The government's unpopularity is keeping a fuel price [increase] and Bank Negara Malaysia interest rate hikes off the table this year," ING said in a note this week. "We expect [the central bank] to use ringgit appreciation to curb imported inflation pressure." Political unrest has been simmering for some time amid rising discontent with longstanding pro-Malay economic policies that resulted in the Barisan Nasional coalition losing its two-thirds majority in
Parliament March 8.

But things are coming to a head as the popularity of former Deputy Prime Minister Anwar Ibrahim grows amid calls for Prime Minister Abdullah Ahmad Badawi to step down or at least clarify when he will.

And just when it seemed things couldn't get worse, the 83-year old Mahathir Mohamad, prime minister for 22 years, on May 20 quit the
United Malays National Organization, Barisan Nasional's leading partner, citing disappointment with Mr. Abdullah's leadership.

The ringgit reacted badly to Dr. Mahathir's resignation, falling to 3.2399 ringgit to the dollar the next day but immediately bounced back.

Malaysia is among a number of Asian countries that subsidize fuel to keep prices low. But that is becoming costly for the government.

Malaysia said this week it will study removing some fuel subsidies, but analysts said that if there are any changes, they will be largely cosmetic, since the government is unwilling to fuel public ire.

That also means there is pressure not to raise rates fast, if at all, to deal with inflation at the expense of weaker growth.

Bank Negara Malaysia opted Monday to keep rates at 3.5% for a 17th straight time, citing balanced risks to growth and prices, though it did signal that increased inflation risks would prompt it to take "appropriate monetary-policy measures" in the future.

Malaysia's consumer inflation stood at 3% in April, marking its highest rate in 14 months and coming in at the top of the government's forecast of between 2.5% and 3% for the year. But it is still low compared with much of Asia.

Malaysian policy makers have been backing the ringgit, apparently favoring ringgit strength over rate increases to control inflation, said Claudio Piron, head of Asian FX strategy at J.P. Morgan.

That comes as the U.S. Treasury this month also said the ringgit was undervalued, given Malaysia's strong terms of trade.

"We are sympathetic to the U.S. Treasury's view," Sean Callow, a senior currency strategist at Westpac, said in a research note. "With inflation a lot less worrisome than elsewhere in Asia...there is no great loss of confidence in Malaysia's macro outlook."

Westpac said it expects the dollar to fall to 3.09 ringgit by the end of September and to 3.03 ringgit by the end of December.

J.P. Morgan's Mr. Piron pointed to Malaysia's current-account surplus -- close to 15% of gross domestic product -- and other solid fundamentals. "If you are worried about high oil and commodity prices, the terms-of-trade impact for Malaysia is fundamentally positive," he said, forecasting the dollar will fall to 3.15 ringgit by the end of June and to three ringgit by the end of the year.

Malaysia is one of the world's biggest producers of palm oil, the most widely used vegetable oil and in demand for biofuel production. The country is also a net exporter of oil and gas. That means the ringgit is one of only five currencies to benefit from higher oil prices, according to a Goldman Sachs report Wednesday.

Nevertheless, some say that feuding in the ruling coalition and waning public support for the government could hurt the ringgit. People are anxious about the rise in political volatility, said Jan Lambregts, head of Asian research at Rabobank. "In Malaysia, investors are not used to this kind of uncertainty."

He said he expects the dollar to fall to between 3.15 ringgit and 3.10 ringgit over the next few months and to end the year around 3.15 ringgit, given a global dollar rally toward the end of 2008.