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".

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