Malaysia’s foreign-exchange reserves are set to drop below $100 billion just when the nation most needs a buffer against any collapse in investor confidence.
It doesn’t help that the holdings were last below that mark during the 2008 global credit crunch and the 1997 and 1998 Asian financial crisis. The decline reflects intervention to support the ringgit, which breached its 1998 peg level of 3.8 a dollar this month and sank to a 16-year low. Default risk for Malaysia has climbed at least 40 basis points above that of Thailand and the Philippines, as dollar bond prices fall for both a troubled state investment company and the country’s state oil producer.
Pressure on Asia’s worst-performing currency intensified this week after Prime Minister Najib Razak sacked his deputy as part of a Cabinet reshuffle for publicly voicing his comments about debt-ridden 1Malaysia Development Bhd. (1MDB). Also removed was the attorney general helping head one of four probes into a Wall Street Journal report that funds linked to 1MDB allegedly found their way into Najib’s accounts.
“A fall below the psychological $100-billion level may roil fragile sentiment further,” said Nizam Idris, Singapore-based head of currency and fixed-income strategy at Macquarie Bank Ltd., the second-most accurate forecaster for the ringgit in the four quarters ended in June in Bloomberg rankings. “The question is, how fast will capital flow out should we suddenly get an intensification of the political story.” A drop below $100 billion would raise concern about a “cash burn,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd., adding the central bank would be hesitant to draw a line in the sand for the ringgit.
“Given the domestic political risks, overlaid with what you see in the oil market and a generally strong dollar, it’s the so-called perfect storm.”