KUALA LUMPUR: Despite the continued weakening of the ringgit against the US dollar, Malaysia can still sustain currency stability during any financial shock that may add to the risk of contagion in the emerging markets.
Economists said Malaysia and a few emerging economies seemed to be saved from the threat as it has strong current account surplus and import to cover, while the risk of foreign outflows to the reserve is small.
The country had also been committed to improving its fiscal deficit level, which could avoid the ‘twin deficit’ situation, they added.
“Yes, we are ‘safe’. Theoretically, reserve is only important for central bank to intervene in the currency market.
"And the maximum amount for them to intervene is basically the amount of foreign money that is here in Malaysia capital market. That is the only money that could go in and out of the country in a short period of time,” an economist told NST Business.
Weakening currencies of emerging markets had led to shrinking reserves, exposing creditors to the risk of contagion, economists said.
Reserve depletion limits the extent to which sovereigns could maintain currency stability during a financial shock, they added.
In total, the risk of foreign outflows from the capital market was about RM220 billion, while Bank Negara Malaysia reserve in ringgit amounted to RM422 billion, said the economist who wanted to remain anonymous.
As at July this year, the total foreign holding in debt securities amounted to RM187.4 billion, while there was only about RM30 billion of hot money leaving the equity market.
“We have enough reserves to cover our shortfall. The risk is much lower as ringgit is only allowed to be traded onshore. And Bank Negara has taken the appropriate action needed to stop any speculative activity via offshore trading on ringgit. Hence the risk of our ringgit being suppressed due to speculative activity is very low if not nil."
The economist said among all the emerging markets, Malaysia and Thailand were “silver lining”, as they were among a few which did not experience a twin deficit.
“As such, the risk of a contagion is much lower as compared to the other emerging economies. However, we are still going to feel the impact from the portfolio outflow due to the tightening of monetary policy in developed economy,” the economist added.
According to Bloomberg Intelligence, China and Malaysia reserves were below the IMF threshold, yet their economies benefitted from a current-account surplus.
“Of the 53 emerging market sovereigns with available data, 42 per cent are below the IMF reserve-adequacy threshold, yet risk is most acute in South Africa and Turkey, where reserves are 36 per cent and 26 per cent below par, respectively,” the firm said.
The market value of emerging markets’ dollar bonds whose sovereign parent failed the IMF reserve-adequacy threshold totalled $625.7 billion, or 33 per cent of the Bloomberg Barclays EM US dollar aggregate, it added.