Currency Forecast - MYR: Maintaining Our Bullish View - SEPT 2017


BMI MALAYSIA CURRENCY FORECAST
Spot 2017 2018
Source: BMI, Bloomberg, updated June 29, 2017
MYR/USD, ave 4.29 4.25 4.15
MYR/EUR, ave 4.90 4.52 4.23
BNM Policy Rate, % eop 3.00 3.00 3.25

BMI View: We have upgraded our 2017 and 2018 end-year forecast s to MYR4.200/USD and MYR4.100/USD respectively to reflect continued MYR strength. We maintain our positive outlook on the currency over the near and medium term as the unit remains supported by a positive technical picture, an undervalued real effective exchange rate, and an improving fiscal outlook.

Short-Term Outlook (three-to-six months)

The breaking of trendline resistance at MYR4.32/USD marks the end of a bearish trend for the ringgit and is likely to signal further strength. We had previously noted that default risks in Malaysia were overblown and that the country would return to political stability while making steady efforts to narrow its fiscal deficit (see ' Rising Commodity Prices To Support Growth ' , February 17).

Break Marks End Of Bearish Trend
Malaysia - Exchange Rate, MYR/USD
Source: BMI, Bloomberg

From the chart below it can be seen that there is still a considerable difference between the MYR and the 5-year credit default swap (CDS) and previous MYR weakness appears to have been largely driven by the spike in the CDS spread. As such, the fall in CDS yields suggests that the MYR is likely to strengthen further in the near-term amid an increase in investor confidence surrounding the fiscal and inflation outlook.

MYR Likely To Strengthen Further
Malaysia - 5-Year CDS (%) & MYR REER
Source: BMI, Bloomberg

Long-Term Outlook (six-to-24 months)

Over the longer-term, we expect CDS spreads to remain low, suggesting that there is room for the currency to strengthen further. Our view is informed by our forecasts for the government to persist with its efforts at fiscal consolidation as well as expectations for Malaysia to remain politically stable. Despite facing challenges such as lower oil prices and slower growth, Malaysia's government has remained committed to narrowing its fiscal deficit, with the government hitting its fiscal deficit target of 3.1% of GDP in 2016. We believe that the government will likely achieve its target of 3.0% of GDP in 2017 amid continued efforts to rein in expenditure while expanding its revenue base through a 6.0% GST (see ' Tourism Tax To Aid Further Fiscal Consolidation ' , June 14).

The continued rollback of various subsidies will also be supportive of the government's efforts at fiscal consolidation and keep inflationary pressures capped. Over the longer-term, the removal of subsidies and the balancing of the government's balance sheet will be disinflationary and positive for the MYR. Furthermore, while credit growth is on a gradual uptrend (with M3 growing by 4.4% y-o-y in April), it is likely to trend below historical averages of 10%.

Remaining Cheap
Malaysia - Barclays Real Effective Exchange Rate
Source: BMI, Bloomberg

In addition, Malaysia's real effective exchange rate (REER) remains cheap by historical standards despite having appreciated by 4.6% since the beginning of the year. We expect this to be supportive of Malaysia's external competitiveness over the medium term.

CNY Stability Reduces Downside Pressure

Lastly, we believe that a more stable CNY will be positive for the MYR given that China is one of Malaysia's largest trade partners. The CNY and MYR have continued to move in the same direction and we believe that a stable CNY reduces the tail risks facing the MYR, as significant CNY weakness would likely feed through to downward pressure on the ringgit. We have upgraded our CNY forecast, expecting it to end 2017 and 2018 at CNY 6.85/USD and CNY7.05/USD, respectively (from CNY7.10/USD and CNY7.40/USD previously), which implies total return strength against the dollar, which should be supportive of the ringgit.

CNY Stability Positive For MYR
Malaysia & China - Exchange Rate, MYR/USD & CNY/USD
Source: BMI, Bloomberg

In view of the aforementioned factors, we have upgraded our forecast for the currency to end the year at MYR4.200/USD in 2017 and MYR4.100/USD in 2018 from MYR4.350/USD and MYR4.200/USD respectively, to reflect the MYR's stronger-than-expected performance thus far. This suggests that the MYR will remain on a gradual appreciatory trend over the medium term.

Risks To Outlook

Risks to our MYR forecast are weighted to the downside. First, the ringgit could face greater than expected capital outflows should the Fed hike interest rates at a faster-than-expected pace. Second, the Donald Trump presidency increases the likelihood of a slowdown in global trade, while additional protectionist measures would be negative for Malaysia's export sector.

Macroeconomic Forecasts (Malaysia 2013-2019)
Indicator 2013e 2014e 2015e 2016e 2017f 2018f 2019f
e/f = BMI estimate/forecast. Source: National sources, BMI
Population, mn 29.7 30.2 30.7 31.2 31.6 32.0 32.5
Nominal GDP, USDbn 312.5 327.0 296.3 296.6 312.4 342.5 374.2
GDP per capita, USD 10,517 10,816 9,644 9,509 9,880 10,688 11,531
Real GDP growth, % y-o-y 4.7 6.0 5.0 4.2 4.7 4.6 4.4
Industrial production, % y-o-y, ave 3.4 5.1 4.5 4.1 4.8 4.4 4.4
Consumer price inflation, % y-o-y, ave 2.1 3.2 2.1 2.1 3.2 2.3 2.1
Consumer price inflation, % y-o-y, eop 3.2 2.7 2.7 1.8 2.5 2.1 2.1
Central bank policy rate, % eop 3.00 3.25 3.25 3.00 3.00 3.25 3.50
Exchange rate MYR/USD, ave 3.15 3.27 3.91 4.15 4.25 4.15 4.05
Exchange rate MYR/USD, eop 3.28 3.50 4.29 4.49 4.20 4.10 4.00
Budget balance, MYRbn -38.6 -37.4 -37.2 -38.4 -39.4 -37.9 -36.1
Budget balance, % of GDP -3.9 -3.5 -3.2 -3.1 -3.0 -2.7 -2.4
Goods and services exports, USDbn 258.5 260.4 191.5 199.2 213.2 226.7 240.7
Goods and services imports, USDbn 230.9 228.5 170.9 180.2 192.6 204.3 216.7
Current account balance, USDbn 11.7 15.1 7.9 6.1 7.1 8.4 9.3
Current account balance, % of GDP 3.7 4.6 2.7 2.0 2.3 2.5 2.5
Foreign reserves ex gold, USDbn 133.5 114.5 95.4 93.1 95.9 98.3 100.7
Import cover, months 8.6 7.5 8.5 7.9 7.6 7.3 7.0
Total external debt stock, USDbn 188.8 196.6 191.0 200.0 209.0 217.0 224.5
Total external debt stock, % of GDP 60.4 60.1 64.4 67.4 66.9 63.4 60.0
Crude, NGPL & other liquids prod, 000b/d 649.0 676.8 711.8 722.0 722.9 749.4 735.6
Total net oil exports (crude & products), 000b/d 63.0 115.1 138.5 140.4 134.1 153.2 132.1
Dry natural gas production, bcm 64.0 65.4 63.1 64.4 65.1 67.3 67.5
Dry natural gas consumption, bcm 31.9 32.5 33.1 33.5 33.8 34.8 35.7