By David Yong , Bloomberg
Malaysia’s ringgit will be “almost a washout” for the rest of this year as a growing fiscal deficit, political turmoil and policy inaction on inflation turn investors away, the nation’s biggest economic think-tank said.
The ringgit will probably weaken to 3.5 per dollar by year end, Ariff Kareem, executive director of the Malaysian Institute of Economic Research, said in an interview in Kuala Lumpur yesterday. The partially government-funded think tank had previously forecast the ringgit would strengthen to 3 per dollar by the end of 2008.
Malaysia on Aug. 29 said its budget deficit will widen to 34.5 billion ringgit ($10.1 billion) this year, or a five-year high of 4.8 percent of gross domestic product, because of a trebling in food and oil subsidies. The ringgit fell this week to near the lowest in a year.
“The deficit is enormous and doesn’t speak well for fiscal management,” Ariff said. “The ringgit is almost a washout. It’s partly a verdict on how the country is being governed. This budget doesn’t help, it worsens the currency position.”
The ringgit may take another three years, instead of two, to reach its “fair value” of 2.8 against the U.S. currency, Ariff said.
Prime Minister Abdullah Ahmad Badawi is counting on oil prices to average $125 a barrel in 2009, unchanged from 2008, to lift revenue by 9.1 percent to 176.2 billion ringgit and narrow the deficit to 3.6 percent of GDP.
The ringgit traded at 3.4215 against the dollar as at 9:20 a.m. in Kuala Lumpur today, down from 3.3875 on Aug. 28, the day before the budget announcement that included tax cuts, a bonus for government employees, and free electricity to the poor.
The currency slumped 4.2 percent in August, the worst month since Bank Negara Malaysia scrapped a dollar link in July 2005, amid concern opposition leader Anwar Ibrahim will grab power by Sept. 16 via defections by lawmakers from Abdullah’s ruling coalition.
“Political uncertainty, perception about the country’s leadership, all these don’t augur well for investor perception,” Ariff said. “The sovereign rating could be affected.”
Malaysia’s gross domestic product grew 6.3 percent in the second quarter, the slowest pace in a year. Annual growth will ease to 5.7 percent in 2008 and 5.4 percent in 2009, from 6.3 percent in 2007, the government said last week.
“We are too obsessed with growth,” Ariff said. “There’s no way we can get back to the growth rate of the late 1980s and it’s not in our interest to get back on track when we grew too fast for our own good.”
`Out of Sync’
The government may be overreacting in its attempt to pump- prime the economy, depleting its resources before a further slowdown in 2009, Ariff said. The institute will probably lower its 5 percent growth forecast for 2009 at a later date, he said.
Fiscal measures to boost the purchasing power of consumers will “unwittingly” fuel inflation, while a “laid back” interest-rate policy will push inflation-adjusted interest rates deeper into negative territory and spur capital flight, he said.
The central bank has kept its overnight policy rate at 3.5 percent in 19 straight meetings since April 2006, even as other Asian nations raised borrowing costs this year to cool soaring prices. Ariff predicts inflation will accelerate from a 26-year high of 8.5 percent in July in the months ahead.
“Local interest rates are artificially low and they are out of sync with what we see in the region,” Ariff said. “Some marginal adjustments are required to send the right message that we are doing something, or else the credibility issue sets in.”