A perfect storm of domestic politics and macro concerns has led to the ringgit losing 15% of its value this year, granting it the ignominious title of Asia’s worst performing currency. The move has put paid to the funding plans of domestic companies as they step back from issuing new debt or equity amid a plunge in investor appetite for Malaysian assets.
“We’re living in a time of great uncertainty,” said Brian Chia, head of corporate and commercial practice with Wong & Partners, a member of Baker & McKenzie International. “Consumer sentiment is down, and the government is feeling the pinch from declining oil and commodity prices. All this exacerbates the pressure on the ringgit.”
Local politics has been a big drag on sentiment, say market participants. Prime minister Najib Razak is fighting to deal with a financial scandal involving state investment fund, 1MDB, amid talk that factions opposed to him are trying to bring his administration down.
Former premier Mahathir Mohamad has been a vocal critic. In a blog post this week he painted a gloomy picture of the economy, saying it was showing signs of cracking and the “people will suffer”.
“The stock market has all but collapsed. Investors, especially foreign investors, are taking out their money to safer places abroad,” he wrote. For his part, Najib has denied any wrongdoing and has come out in defence of his country, saying Malaysia is not a “failed state”.
At the same time, the central bank has been forced to defend the currency by dipping into its coffers, with its foreign exchange reserves declining to $94.7bn as at end-July. As GlobalCapital Asia went to press the ringgit was trading at 4.12 to the dollar, compared with 3.18 a year ago.
Debt conundrum
“When it comes to choosing offshore currencies for debt funding, we must be able to satisfy two key criteria: cost savings and diversification. In that sense [the ringgit] was one of our favourite currencies as we were ramping up a move away from dollars and diversifying into emerging market local currencies.
“But looking at how it’s performed since earlier this year, we ditched the currency and instead are closely watching the Thai baht and Singapore dollar, but even these two have been dropping since China let the renmimbi fall.
“It’s a big conundrum for us at the moment. We are not in urgent need of money, so we will wait and see.”
Angus Salim, head of global financial markets for RHB Investment Bank, said that amid higher yields and a softening outlook for the economy, many domestic companies were now reassessing their funding plans and asking themselves if they really needed to issue this year.
Yields on government securities, meanwhile, have risen on average 15bp-30bp from where they were a few months ago, and new corporate issuers would have to pay similar increases on their debt, said a Malaysia-based DCM banker.
“It’s going to hit everybody, irrespective of sector, and investors are looking at ratings,” he said. “We haven’t seen corporates pulling out of the bond market yet. But there has been no issuance in the past two weeks, and we are hoping the dust settles and the political situation calms down.”
While red flags are being raised on bond desks, loans bankers are putting their faith in Malaysia’s still-ample domestic liquidity. “Banks like CIMB are dollar-rich, so even if a borrower has need for dollar funding, they can approach those channels rather than coming offshore,” said a loans banker.
The ringgit has been freefalling since July, but the sell-off intensified at the end of last week after word spread that investors in a government bond had decided not to rollover their debt and instead repatriated the funds to dollar debt, said a head of research with a foreign bank in Malaysia.
“I’m advising my clients that if you don’t need to invest in Malaysia, then stay out,” he said. “But if you absolutely have to buy local stocks, then we will recommend places to hide, such as in defensive sectors like exporters, utilities and construction companies.”
For instance, Baring Asean Frontiers Fund’s equity exposure to Malaysia has been in the low-single digits for the past few months, amid a subdued outlook for EM, said its fund manager, Soo-Hai Lim. And the weakness in the ringgit will only compound the lack of appetite for new issuances, he said.
For now, market watchers say they cannot hazard a guess as to where the ringgit is headed, or if there is a floor. “Many of the external pressures driving down the ringgit are beyond Malaysia’s control,” said Wellian Wiranto, a Singapore-based economist at OCBC.
“The country can’t suddenly ring up the People’s Bank of China and tell them to stop devaluing the yuan, or set the direction for oil prices like Saudi Arabia can. But Malaysia has not lost its ability to borrow and there is no issue when it comes to debt servicing, although its funding costs may be higher.”
One key challenge facing policymakers, according to Wong & Partner’s Chia, was that it had few weapons in its arsenal to deal with the macro uncertainties. This has left the authorities with few credible options — they could either continue to defend the currency, which is not sustainable, or raise rates, which would be a drag on growth.
‘ECM is dead’
It does not help that most of the recent equity issuances are now trading beneath their issue price, whether they be IPOs or block trades. The country’s two largest IPOs for the year, Malakoff Corp and Sunway Construction, were down 17% and 11%, respectively.
To raise funds, many companies have been turning to rights issues, which have emerged as a last line of defence, say bankers. But even then issuers have been pushing fees down. Public Bank paid a dismal 50bp on its MR4.83bn ($1.18bn) rights issue last year, and Malaysia Airports 60bp after that.
Despite everything, some are adamant the IPO pipeline has not vanished, even if the deals in the offing are not billion-ringgit trades. One banker said he was lining up investors for the MR400m ($96.90m) IPO of Red Sena, a special purpose acquisition company in the food and beverage sector. The float secured regulatory approval in July.
“This is not the time to panic. [The ringgit’s weakness] will have a short-term dampening effect on capital market activity, but markets are cyclical,” argued Joe Bauerschmidt, a partner and head of capital markets for southeast Asia at DLA Piper.
A head of fixed income based in Singapore agrees. “To be fair, those on the ground in southeast Asia will know that [Malaysia] is still a very financially sound country with a surplus,” he said. “It’s not going to run away from an investment grade rating anytime soon.”
Additional reporting by Shruti Chaturvedi, Rev Hui, Christina Khouri and Narae Kim.