Ringgit fighting a double edged sword

KUALA LUMPUR: Declining oil prices coupled with China's struggling economy have largely contributed to the depreciation of the ringgit, economists said.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said the crude oil price, which dipped to US$50 per barrel recently, did not augur well for the Malaysian economy.

"Declining oil prices sparks speculation of lower government revenue, hence larger-than-initially anticipated budget deficits," he told Bernama.

Lower oil prices have also exerted pressure on Malaysia's external trade which has recorded a negative growth in the first five months of this year, he said.

This would in turn, trims the country's current account surplus and triggers concerns over the possibility of "twin deficits", he said.

"Malaysia's gross domestic product growth for 2015 may also be adversely affected if oil prices remain low throughout the year, inducing additional capital outflows, especially if portfolio investors become less sanguine about the prospects of corporate earnings," he added.

As for China, Zahidi said the sluggish economic condition would have a negative impact as it might dampen demands, resulting in a decline in imports from the country with 1.4 billion people.

China remains Malaysia's largest trading partner with total trade of RM85.83 billion for the period January-May 2015 and hence, Malaysia's economy could still feel the heat of the slowdown, he said.

Echoing the sentiment, Kenanga Research economist Wan Suhaimie Saidie said the bias for the ringgit was still on the downside in the short- to medium-term.

"We expect the ringgit's volatility to subside and stabilise around RM3.65-RM3.75 by year-end," he said, adding that the adverse impact of the Goods and Services Tax (GST) is expected to stabilise by year-end.

On the external front, he said the global economy, led by the US, is expected to improve by year-end, with the start of the US Federal Reserve's rate hike, while the European Union and China' economy stabilise.

Another analyst said there should be more efforts directed at further enhancing the economic fundamentals and diversifying into non-oil based revenues.

"Although the implementation of the GST is a good start, there should be more efforts (directed) towards this," said the analyst who requested anonymity. He said it would take at least one year for a country to gain the full benefit of any new tax regime such as the GST.

Malaysia implemented the GST at the rate of 6% on April 1, joining 159 other countries, in the quest to provide a more transparent and systematic tax system. Prime Minister Datuk Seri Najib Razak, had on June 6, said that the slumping oil prices could have sent Malaysia into an economic crisis had the GST not been imposed.

He said the new tax regime helped broaden the country's revenue stream to avoid a high reliance on oil revenues. A chief economist from research firm, who also wishes to stay anonymous, said the government should also instill more confidence in the market following recent changes in the country's political climate.

Asli Centre Public Policy Studies chairman Tan Sri Ramon Navaratnam said the present political problems should not detract the government from paying greater attention and showing greater political will by taking the "bull by the horns". The government should regain the people and investors' confidence, he said.- Bernama