KUALA LUMPUR, Dec 31 — The ringgit saw a mixed performance in 2018 despite entering the year on a bullish footing, as the local currency was dragged down by a sharp change of sentiment in the second quarter, heavily influenced by external drivers.

The local unit was affected by various external factors ranging from global trade development, emerging market chaos, Federal Reserve (Fed) interest hike speculation, crude oil price movement and the strengthening of the US dollar.

The ringgit kicked off 2018 at 4.0370/0400 versus the greenback on Jan 2, extending its vibrant performance of 2017, having climbed from a historic low of 4.48 earlier in the year.

The weakness of the US dollar and positive domestic developments were supporting factors with Bank Negara Malaysia’s (BNM) prudent measures keeping the local currency in check.

In its ascend, the ringgit broke the 4.00 key level on Jan 5 with a 17-month high of 3.9950, last seen on Aug 16, 2016, amid improving oil prices and economic outlook

On expectation of continuing strong growth momentum in 2018 due to stronger global growth and positive spillovers from the external sector to the domestic economy, the central bank increased the Overnight Policy Rate (OPR) by 25 basis points to 3.25 per cent on Jan 25, which helped strengthen the ringgit further.

It was the first rate hike since July 10, 2014, as the last OPR change was in July 2016 with a 25-basis point cut. The rate was maintained for the rest of the year.

The local currency hovered below the 4.00 level but made an about-turn to breach the level again on June 19, at 4.0020/0050 – the first time in more than five months.

The drop, analysts said, was in tandem with other emerging Asian currencies as sentiment was dampened by the latest wave of fear of escalating trade war between the US and China that had hit equity markets and boosted the appeal of safe-haven assets.

FXTM research analyst Lukman Otunuga said talk of a Fed hike had boosted the US dollar, fuelling capital outflows from emerging markets (EM) and exposed the ringgit, like many other EM currencies, to downside shocks.

"The EM pain intensified during the third quarter, as the US-China trade tensions heightened, and it not only reduced investors’ appetite for risk but, at the same time, boosted buying sentiment towards the greenback as the safe haven currency,” he told Bernama.

Lukman noted that although the ringgit eventually weakened to a yearly low of 4.20 against the US dollar in November, it remained one of the best performers compared with other EM currencies.

"While the ringgit has depreciated about 3.21 per cent year-to-date in December, the Indonesian rupiah has shed 6.77 per cent while at the extreme end of the spectrum, the Argentine peso is down 51.05 per cent,” he said.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid also pointed out the mixed performance of the ringgit in 2018, which had weakened to the greenback, Japanese yen, Thai baht and Singapore dollar but was stronger vis-a-vis the Australian dollar, Indonesian rupiah and Indian rupee.

"The factors affecting the ringgit’s performance were mostly externally oriented which included the prospect of higher interest rates in the US and other advanced economies, the trade tensions between the US and China as well as the unsettling news on the UK Brexit deal,” he said.

To some degree, the unexpected outcome of the 14th General Election (GE14) also contributed to the local currency’s performance following concerns on economic policies.

However, the unveiling of the Mid-Term Review of the 11th Malaysia Plan and the tabling of Budget 2019 have alleviated such worries as economic policies became clearer although challenges are still abound.

"Be that as it may, the ringgit is not severely affected as the country is not experiencing the twin deficits, with Malaysia continuing to record surplus balance in the current account,” he said, adding that this factor had helped to sustain the ringgit’s performance throughout the year.

"We could see some form of BNM’s intervention in the foreign exchange (forex) market, judging from the movement in the international reserve assets.

"However, the central bank has emphasised that any intervention in the forex market is to smoothen the volatility in the currency market and not to dictate the direction of the ringgit.

"In that sense, the level of the ringgit will be determined by the markets,” he explained.

However, 2018 had been quite a volatile year for the capital market with foreign funds being net sellers most of the time this year, he added.

On Dec 31, the local unit ended the last trading day of 2018 at 4.1300/1350 versus the US dollar compared with 4.0440/0500 on Dec 29, 2017.

Against other currencies, the local currency appreciated against the euro to 4.7227/7300  from 4.8451/8535 on Dec 29 last year and surged versus the British pound to 5.2600/2684 from 5.4602/4687 previously.   and

The ringgit fell vis-a-vis the Singapore dollar to 3.0310/0358 from 3.0265/0323 year-on-year and weakened against the Japanese yen to 3.7488/7543 from 3.5912/5968 previously.

Moving forward, Lukman opined that the ringgit had scope to appreciate next year if domestic economic conditions in Malaysia continue to improve.

A healthy increase in domestic private consumption and exports remain the key ingredients for Malaysia to experience an economic expansion while easing trade tensions, improving global conditions and a depreciating US dollar are external factors to support the ringgit in 2019, he said.

"If economic data from the US starts to disappoint and the Fed holds back from raising interest rates, this will be a welcome development for not only the ringgit but other emerging market currencies.

"However, the ringgit still has the potential to appreciate in the event of higher US interest rates if BNM adopts a more hawkish approach towards monetary policy normalisation,” he added.

Meanwhile, Mohd Afzanizam viewed that external events would continue to dominate the ringgit’s performance next year particularly the US Federal Fund Rate (FFR), whereby discussion on the neutral rate – a rate neither contractionary nor expansionary – has become more active these days.

This will set the tone for global growth prospects next year and beyond, as the US Treasury yield curve would flatten further or even invert at some point given that the short-dated securities such as the 3-month and the 2-year US Treasury yield curves are very sensitive to FFR, he said.

On BNM’s monetary policy stance, most economists believe that the central bank will likely hold the OPR at 3.25 per cent throughout 2019 based on a number of factors.

These include the expectation of the US Fed raising the interest rate three times next year, a slowdown in global growth, and possible further escalation in trade tensions.

As for 2019, the ringgit is expected to range from 3.90 to 4.25 with most economists projecting an appreciation against the US dollar by end of 2019.

Economists believed that the US Fed interest rate hike cycle is really close to the high, nearing the neutral rate of three per cent.

"Although the US Fed will likely continue with the interest rate hike, the aggressive rate hike cycle seen in 2018 and 2017 will likely come to an end,” said an economist.

He believes the capital flows would also favour Malaysia next year whereby the outflow will be limited and manageable from 2019 onwards which will help to strengthen the ringgit.

Banking

As for other developments in the finance/banking industry, 2018 was not without its controversy, with a significant number of high-ranking executives from Malaysia’s corporate scene giving up their posts over the past few months following the change in government.

The financial sector was not spared. Tan Sri Muhammad Ibrahim resigned as the central bank governor in early June before completing his five-year term, having been appointed in May 2016.

Datuk Nor Shamsiah Mohd Yunus was then appointed as the new governor for five years effective from July 1, 2018.

Muhammad was said to have fallen out with the new government over BNM’s purchase of a piece of land from the Finance Ministry for RM2.066 billion in December 2017. The money is now confirmed to have been used to pay the interest on 1Malaysia Development Bhd’s debts.

The banking industry also saw Datuk Seri Nazir Razak stepping down as CIMB Group chairman and Khairul Kamarudin relinquishing his position as chief executive officer at Bank Islam Malaysia Bhd.

The sector also saw a merger after non-bank lender Malaysia Building Society Bhd (MBSB) completed its RM645 million takeover of Asian Finance Bank Bhd (AFB) in February to emerge as a full-fledged Islamic bank in Malaysia.

A merger of the two entities created the country’s second-largest stand-alone Islamic bank with total assets of RM47.81 billion, after Bank Islam Malaysia Bhd.

The acquisition of AFB is MBSB’s third attempt to acquire an Islamic banking unit after its two previous failed attempts to acquire Bank Mualamat Malaysia Bhd and the Islamic banking units of CIMB Group Holdings Bhd and RHB Capital Bhd.

On the sector’s performance, analysts opined that local lenders’ performance continued to be satisfactory despite economic and financial uncertainties at home and abroad.

Based on the third quarter ended Sept 30, 2018 performance, most banks posted improved earnings, with six of Malaysia’s eighth-largest banking groups posting higher earnings during the quarter except for Maybank, which was affected by global volatility, and Public Bank Bhd, which had recorded a higher net profit a year earlier due to a one-off gain.

Moody’s Investors Service has also maintained its stable outlook for Malaysia’s banking system this year in view of the continuous robust operating conditions in the country.

Its vice-president and senior analyst for financial institutions group, Simon Chen, said the projection was based on the stable fundamentals of Malaysian banks, stable asset quality trend as well as strong capital and liquidity buffers.

MIDF Amanah Investment Bank senior analyst Imran Yassin Yusof said the banking sector’s performance under its coverage was within expectations, with RHB performing at the upper bound.

He observed that banks which were mostly confined to Malaysia had performed well, although Maybank and CIMB’s performances were slightly disappointing owing to their regional exposure in Indonesia, impacted by currency translation.

The better performance was mainly due to the lower impairments in most banks as asset quality remained solid, he said.

"Loans growth was also robust despite moderate GDP growth with the consumer segment being the key driver, led by mortgage.

"The robust loan growth cushioned the impact of net interest margin compression which came about from deposit competition. We foresee the trend will continue into 2019.

"Also, we opine that we need to include Alliance Bank and Bank Islam as notable mentions, as their performances have also been robust,” he said.

As for the main challenge for the industry in 2018, Imran said, it was the net interest margin compression which stemmed from repricing of deposits and also deposits competition.

"This had chipped at the net interest income of some banks and moderated the impact of the OPR hike in January this year. Also, the challenging market conditions have affected non-interest income as well,” he explained.

The central bank’s move to extend the observation period for the net stable funding ratio requirement to 2020 had helped eased deposit competition, he said.

Moving forward, Imran said MIDF was cautiously optimistic of the banking sector to continue its solid performance in 2019 but maintained its positive view on the sector.

"We believe that the banking sector will be able to maintain its earnings potential given continued loans growth and stable asset quality. This also means that there will be accretion in value for banks’ book value,” he added. — Bernama