A perfect storm hits Malaysia

Malaysia's ringgit has been especially hard hit by the devaluation of the Chinese yuan.

The devaluation of the yuan has unsettled markets across the globe. But the fallout has been worst in Asian foreign exchange, with Malaysia's ringgit hit especially hard. The currency has lost almost 25% in the past year, making it the region's worst performer.

It has not been this weak against the US dollar since the Asian crisis in the late 1990s. The stockmarket has hit a three-year low and government bond yields are at their highest level since the global financial crisis, as prices have plunged.

Why the carnage? Many investors saw the yuan's slide as a threat to China's export-dependent neighbours, but the ringgit "has a set of issues all its own", as Anjani Trivedi and Ewen Chew put it in The Wall Street Journal. It looks vulnerableon every front.

For starters, it is one of the region's more China-exposed economies, with exports to the larger country comprising around 8% of GDP. Meanwhile, it is an exporterof commodities, notably oil which has been hit especiallyhard by the downturn. Malaysia is Asia's only major netoil exporter.

What's more, Malaysia's financial defences look weak. Foreign exchangereserves have dwindled to a five-year low of less than$100bn. With little firepower left to prop up the currency if itfalls much further, the central bank may have to raise interestrates to keep capital in the country. That would underminegrowth, already at a two-year low of 4.9% year-on-year.

Malaysian manufacturers tend to compete with China in manyoverseas markets, adds Capital Economics, while US dollardebt is also relatively high. Also, investors' confidence in theauthorities has been badly dented by a corruption scandal, withinvestigators probing transfers into the personal bank accountof the prime minister. Malaysia, concludes Mizuho BankSingapore's Vishnu Varathan, is facing a "perfect storm".

Recommended

Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
What China’s new red dawn means for Hong Kong
Chinese economy

What China’s new red dawn means for Hong Kong

China has once again moved to tighten its control over the former British territory and global financial centre. What will remain of the old Hong Kong…
10 Apr 2021

Most Popular

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
Nuclear power might never be popular – but now looks a good time to invest
Commodities

Nuclear power might never be popular – but now looks a good time to invest

Nuclear power gets a very bad press, but it is the ultimate renewable energy source. Interest in it is perking up again, says John Stepek. Which means…
9 Apr 2021
How to find companies that can thrive in the post-Covid world
Advertisement Feature

How to find companies that can thrive in the post-Covid world

Many sectors of the global economy will return to something resembling pre-pandemic status, but others will take far longer to recover.
8 Apr 2021