Malaysia’s ringgit had its best month since January 2012 after the government announced a consumption tax and scrapped sugar subsidies to bolster revenue, allaying concern about a credit-rating downgrade.
The currency touched a four-month high of 3.1232 per dollar on October 28 following last week’s budget. Policy makers reiterated a pledge to cut the fiscal deficit to 3.5 per cent of gross domestic product next year from four per cent in 2013, while the goods and services levy is due to come on stream in April 2015. Fitch Ratings lowered the outlook on Malaysia to negative from stable in July, citing a lack of budgetary reform. Three-year bond yields dropped the most since at least January.
"People see the budget as a turning point that the fiscal deficit is going to be managed properly," said Wong Chee Seng, a currency strategist at Ambank Group in Kuala Lumpur. "That’s the kind of insurance that will prevent rating agencies from downgrading Malaysia. Export numbers have started picking up."
The ringgit advanced 3.3 per cent in October, the best performance among more than 100 global currencies tracked by Bloomberg, to 3.1554 per dollar as of 5.37pm in Kuala Lumpur. The Malaysian unit fell 0.3 per cent today after the Federal Reserve said yesterday it sees signs of "underlying strength in the broader economy" and decided to maintain its US$85 billion in monthly bond purchases.
The US central bank will hold off from trimming the monthly debt purchases until March, according to analysts surveyed October 17-18 by Bloomberg. A reduction was forecast for December in a similar survey a month earlier.
Southeast Asia’s third-largest economy will expand five per cent to 5.5 per cent in 2014 from an estimated 4.5 per cent to five per cent in 2013, according to the finance ministry’s economic report released October 25. It has run annual fiscal shortfalls since 1998. Fitch rates Malaysia A-, the fourth-lowest investment grade.
Export growth accelerated to an 18-month high of 12.4 per cent in August, while the trade surplus reached RM7.1 billion, the biggest since February, official data showed this month.
The central bank has kept the overnight policy rate at three per cent since a 25 basis point increase in May 2011. It’s forecast to keep borrowing costs unchanged at a November 7 review, according to all eight economists surveyed by Bloomberg. Policy makers will assess risks to inflation and economic growth at its rate meeting, central bank Governor Tan Sri Zeti Akhtar Aziz told reporters in London yesterday.
One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, fell 360 basis points, or 3.6 percentage points, this month to 7.36 per cent. The rate declined 46 basis points today.
The yield on the 3.172 per cent sovereign bonds due July 2016 dropped 29 basis points in October, the biggest monthly decrease since the debt was sold in January, to 3.12 per cent, according to data compiled by Bloomberg. It climbed one basis point today. Ten-year yields declined 15 basis points since September 30 to 3.62 per cent.
The front- and back-end of Malaysia’s bond-yield curve will probably outperform mid-term debt in a post-budget rally, Kumar Rachapudi, a Singapore-based senior rates strategist at Australia & New Zealand Banking Group Ltd, said in an October 28 interview.-- Bloomberg