Malaysian Ringgit Will Be a `Washout', Institute Says

Sept. 4 (Bloomberg) -- Malaysia's ringgit, Southeast Asia's second-worst performer in the past three months, will be ``a washout'' in 2008 as a growing budget deficit and policy inaction on inflation turn investors away, a 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, the nation's biggest, had previously forecast the ringgit would strengthen to 3 per dollar by the end of 2008.
Prime Minister Abdullah Ahmad Badawi, facing an opposition challenge, last week said the government will hand bonuses to civil servants, double the number of households on welfare and cut income tax. The 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, he forecast.
``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 currency traded at 3.4295 against the dollar as at 2:32 p.m. in Kuala Lumpur, down from 3.3875 on Aug. 28, the day before Abdullah's budget announcement. It reached 3.4430 yesterday, the weakest since Sept. 24, 2007.
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.
Not Worrying
Abdullah said today the currency ``has not reached a worrying level.'' He 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 budget deficit to 3.6 percent of GDP.
The ringgit 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 through defections by lawmakers from Abdullah's ruling coalition.
``Given the risks, people will re-look their portfolio holdings in Malaysia and ask if they still make sense,'' said Daniel Hui, a Hong Kong-based currency strategist at HSBC Holdings Plc, Europe's biggest lender. ``The politics is getting no better and inflation is worse.''
Malaysia's sovereign rating may be affected by political uncertainty and weakening investor perception, Ariff said.
`Obsessed'
The country's economy 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.''
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.
The deficit is also ``a great concern'' to the government, Abdullah told reporters in Kuala Lumpur today. ``The increase is not going to be permanent. Now, we need to spend. The people need help with the global crisis.''
Interest Rates
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, Ariff 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.''

tunku : i hope the MIER executive director is wrong but with pak lah on it, it's possible.our economy is bad indeed.uncertainties and unstable is what we can see with the leadership of pak lah.