Wither The Ringgit

The Ringgit has going form strength to strength, as this article asserts:

Malaysian ringgit expected to remain strong
Robust demand and credit growth may entice fresh foreign funds

KUALA LUMPUR: The ringgit, which temporarily broke to 3.08 level last week, is expected to remain strong.

“The market may hold up at this current level,” a dealer said, adding that robust domestic demand and credit growth were expected to entice fresh funds from foreign investors.

A forex dealer told Bernama that the ringgit might breach the 3.06 mark against the greenback in about two weeks, after hitting its strongest level since October 1997 at 3.0873.

The local unit rallied to new 13-year highs in four straight weeks amid speculation that rules would be further loosened to enable the local currency to be traded offshore…

…Yesterday, the local unit ended higher at 3.0900/0930 against the US dollar compared to Thursday’s closing of 3.0950/0980 after the local bourse managed to pare some of its earlier losses on bargain hunting activities.

Bloomberg reported that Barclays Capital Plc had raised its forecast for the local currency, predicting a 6.1% appreciation over the next 12 months as foreigners plow more funds into the nation’s assets.

FTSE Group, a global index provider, had also upgraded Malaysia to “advanced emerging market” status, a move that will attract as much as US$3bil of new inflows to the local stock market, Bloomberg quoted Barclays as saying.

I’m not going to do a full analysis of current trends for another month or so, as the final numbers for September aren’t in yet, and there’s still the vexing problem of price deflators, which are published much later – the latter’s essential for coming up with the inflation adjusted series.

But the current movements are pretty broad based:

I’d been looking for the MYR to hit its old value of RM2.50-RM2.70 to the USD by the end of this decade as the economy gets closer to high income status, but at the current pace we might actually see that target hit by the end of next year.

Even at current levels, I’d call the Ringgit a little overvalued relative to economic fundamentals – if Barclays forecast comes true, then I’d consider it more than a little overvalued, and BNM might actually be tempted to intervene to limit the Ringgit’s appreciation. I’d be more comfortable with a rate of appreciation of around 2.0%-3.0% per annum, which would be more consistent with improvements in the internal exchange rate and with declining economic strength in the West (exchange rates are relative prices remember). But when we start hitting 5.0% appreciation (or depreciation for that matter) is when I think BNM breaks out the ammo.

It’s pretty obvious that the MYR’s strength isn’t due to trade or the terms of trade (i.e. higher prices of our commodity exports) – it’s more financial and portfolio flows, as risk aversion in global markets recede. That would be ok, if our asset markets are undervalued. They’re not, as the recent rumbling about a property bubble shows. Neither are the capital markets immune with MGS yields much lower than would be expected given the rapid pace of issuance over the past two years, and the KLCI looking a little toppish by fundamental standards:

What all this means is: while the economy is doing alright, we’re being put at risk by excessive capital inflows that can be highly destablising. Time for capital controls? Maybe, especially since Korea and Indonesia have already “broken the ice” by instituting short term restrictions on portfolio capital in the last few months.