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WorldPosted at: Jul 30 2015 4:41PM


Malaysian central bank grips ringgit tightly as troubles mount

By Vidya Ranganathan SINGAPORE, Jul 30 (Reuters) Protecting the ringgit from political fallout out may end up costing Malaysia more than any bailout for the debt-ridden 1MDB state fund, given the rate at which the central bank has been using its reserves in recent weeks. Bank Negara Malaysia (BNM) has taken an iron-fisted approach, barely allowing the ringgit to move since early July as investors became increasingly unnerved by the deepening scandal over how 1 Malaysia Development Berhad got into
11 billion of debt. On Tuesday, Prime Minister Najib Razak sacked his deputy, who had called on him to give Malaysians a better explanation of where 1MDB's money went. Three other ministers were also shunted in the reshuffle. Najib also replaced the attorney-general. On Thursday, the rumour mill went into overdrive forcing the central bank to deny that Governor Zeti Akhtar Aziz was resigning. Financial markets were understandably nervous at the prospect of the well regarded Zeti, who has headed the central bank since 2000, becoming another casualty of the affair. Since early July, even as foreign investors pulled out of Malaysian markets and risk metrics spiked, the ringgit has remained close to 3.8 to the dollar. That is the same level the ringgit was pegged at during the Asian financial crisis by the then-Prime Minister Mahathir Mohamad, when he sacked his deputy Anwar Ibrahim in 1998 and imposed capital controls that lasted seven years. Currency reserves fell
5 billion in the two weeks to July 5 as the central bank defended the ringgit and analysts estimate a lot more could have been spent since as the political storm around Najib intensified. "We've crossed the Rubicon on a couple of politically sensitive levels and clearly there is some heavy smoothing operation going on," said Claudio Piron, head of rates and currency strategy at BofA Merrill Lynch in Singapore. "That is evident in the FX reserves numbers and the behaviour of the ringgit that is holding around the 3.8 levels." The ringgit is Asia's weakest currency this year, having shed nearly 9 percent of its value against the dollar. The decline largely reflected concerns over its vulnerability to rising U.S. interest rates and the halving in the price of oil in the past year, which has dragged down the price of gas, though not by as much. Malaysia is the world's second largest exporter of liquefied natural gas. Foreigners own
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