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Nikkei Markets

Malaysian ringgit swoons on worries over bond index exit

Analysts flag mounting risk from capital outflows to continue to weigh on unit

KUALA LUMPUR (Nikkei Markets) -- The Malaysian ringgit, which started the year as one of the best performing Asian currencies, has been recently hammered to give up all its gains against the U.S. dollar and the pressure shows no immediate signs of easing amid mounting risks of foreign capital outflow.

The ringgit shed more than 1.5% of its value against the greenback in the past month, racking up loss of about 0.3% against the dollar so far this year. On Thursday, the ringgit fell by about 0.2% to 4.1475 amid worries over Malaysia's potential expulsion from FTSE Russell World Government Bond Index.

"The ringgit is struggling again, driven on the back of capital outflows," said Stephen Innes, head of trading at SPI Asset Management. Malaysia is suffering from "one-two punch" following the Norwegian sovereign wealth fund's decision to cut emerging-market debt including Malaysian securities from its index, he said.

On April 15, FTSE Russell flagged that it may drop Malaysian debt from the World Government Bond Index due to concerns over market liquidity. That spurred a sell down in Malaysian bonds by foreigners who hold nearly 25% of outstanding government debt.

If FTSE Russell follows through its move, Barclays estimates foreign investors could unwind as much as $10 billion of their holdings in Malaysian Government Securities. Maybank Kim Eng forecasts risks of outflow at about $4 billion by passive funds and a further $2 billion-to-$4 billion by active funds.

"The risk of dropping Malaysian bonds from the WGBI seems more likely than not, in our view, unless fundamental changes are made to improve Malaysia's market accessibility level," Maybank Analysts Winson Phoon and Se Tho Mun Yi wrote in a note to investors.

Barclays however kept its forecast for the ringgit to end 2019 at 4.12, but noted "relatively mild" ringgit depreciation into year-end. "It is not certain that MGS will be dropped from the FTSE Russell index," the bank added.

The warning also comes as foreign investors dumped more than 2 billion ringgit, or over $481 million, of Malaysian equities year-to-date on a net basis. Foreign shareholding accounts for about a quarter of Malaysian stocks.

The FTSE Bursa Malaysia KLCI fell to a three-year low Thursday after losing 4.7% so far this year, the worst-performing major equity market in the world amid tepid corporate earnings outlook, domestic policy risks, and potential fallout from ongoing trade war between its major trading partners China and the U.S.

The ongoing sell-down could possibly last until the next federal budget announcement in the fourth quarter, said Phillip Mutual's Chief Strategist Phua Lee Kerk. "However, the sell-off will be gradual," he said. A rapid decline however could push the ringgit to a low of 4.500 against the U.S. dollar, he said.

Since wresting power after a shock election mandate last year, Malaysia's ruling Alliance of Hope coalition has stepped up efforts to fix debt-laden government finances by cleaning up its balance sheet and scrapping costly infrastructure projects.

The government has also made a slew of announcements that rattled stock market investors, including formation of a panel that has since identified two listed companies among others that enjoy monopolistic influence over supplies of key goods and government services.

Moreover indications of a slowing economy are also weighing on investors' sentiment. The industrial production in February expanded at its slowest pace in eight months, and when combined with other high-frequency data on economic activity, suggests that gross domestic product growth moderated to 4.5% year-on-year in the first quarter, estimates Barclays Economist Brian Tan. The economy had expanded 4.7% in the final three months of 2018.

--Jason Ng and Gho Chee Yuan

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