Ringgit staggers after index-fund double punch

DUBAI: It was a one-two punch that’s turned the ringgit into Asia’s worst performer this month.

FTSE Russell said Monday it may drop Malaysian debt from the FTSE World Government Bond Index because of concern about market liquidity, roiling the nation’s currency and bonds yesterday.

And less than two weeks ago, Norway said its sovereign wealth fund would cut emerging-market debt including Malaysian securities from its index.

Getting dropped from the FTSE gauge may lead to outflows of almost US$8 billion, based on the nation’s weighting of 0.39% and IMF’s estimate that US$2 trillion track the index, Morgan Stanley said.

Foreign investors have been reducing their Malaysian government bond positions since late 2016 and held about US$37 billion of the securities as of March, Min Dai, a Hong Kong-based strategist at Morgan Stanley, wrote in a report.

The ringgit steadied in early trading today after sliding 0.6% against the dollar the previous day. Yields on the benchmark 10-year bond were little changed following a four-basis point jump on Tuesday.

“The risk of dropping Malaysian bonds from the flagship index seems more likely than not, in our view, unless fundamental changes are made to improve Malaysia’s market accessibility level,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities Ltd in Singapore.

Malaysia’s bonds had just capped a fourth month of gains in March on expectation that the central bank may cut rates as early as in May.

Bank Negara Malaysia (BNM) pledged last month to keep monetary policy accommodative as global risks weigh on the trade-reliant economy.

Even Prime Minister Dr Mahathir Mohamad has weighed in, warning that the nation may impose measures to protect the ringgit if speculators attack the currency, according to a report in The Star.

“Foreign bond inflows have been buttressing the ringgit of late as the market has started to price in the possibility of a BNM rate cut at the next policy meeting,” said Stephen Innes, head of trading and market strategy at SPI Asset Management.

“Even if the exclusion does occur it should not have any discernible effect on credit ratings so, despite this unexpected shocker, it’s likely a bit overdone, and I would expect cooler heads to prevail.”