Prakash Sakpal, economist at ING, believes that the latest selloff in Malaysian government bonds and the ringgit (MYR) is overdone as nothing has changed in country’s economic fundamentals to warrant such a sudden shift in investor sentiment.
“Growth continues to be softer, in keeping with a broader global trend. The economy posted negative inflation in recent months (-0.7% year-on-year in January and -0.4% in February), thus paving the way for a BNM policy easing. The BNM has recently signalled continued policy accommodation.”
“We believe a rate cut is more likely than not at the next meeting on 7 May. As such, the current economic trends have been government bond-friendly, even as weak public finances and a high level of public sector debt remain a long-term negative.”
“As for the currency, Malaysia’s external payment position remains sound, with a current account surplus at 2-3% of GDP sustaining the MYR's appreciation. This is further supported by the currency's prevailing undervaluation on a real effective basis. Among other things, a softer US dollar environment and rising global oil prices also help.”
“Such a backdrop leads us to a view that the current sell-off in both government bonds and the currency is overdone. We maintain our view of the USD/MYR trading to 4.05 by end-2018 (spot 4.15).”
“Prime Minister Mahathir Mohamad, well-known for his erstwhile policy of capital controls, has wasted no time in warning the speculators.”
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