Popularity Is Now a Curse for Malaysia and Indonesia's Currencies
By Y-Sing Liau
The popularity of Malaysia’s ringgit and Indonesia’s rupiah among global investors has made them Southeast Asia’s most volatile currencies, just as the region heads for troubled waters.
Already reeling from a commodity slump, debt in the two nations is seen by strategists as the most vulnerable to concerns surrounding the U.S. presidential election and the Federal Reserve’s next interest-rate increase. One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, is the highest in Southeast Asia at 8.9 percent, while the rupiah is second at 7.3 percent.
“Because so many foreign investors are already long Malaysian and Indonesian local-currency government bonds, these risk positions will be reduced, mostly through currency hedging,” said Maximillian Lin, a currency strategist at UBS Group AG in Singapore. “The rush to hedge under such circumstances usually sees further pressure for a currency to weaken.”
Overseas ownership of Malaysian debt has climbed four times over in the past decade to 36 percent, and Indonesia’s has tripled to 38 percent. While that would typically be seen as a vote of confidence, the situation is less desirable in times of financial-market stress, such as when funds stampeded out of Asia during the 1997 regional financial crisis.
Foreign ownership of the two nations’ bonds are the highest among five Asian economies tracked by the Manila-based Asian Development Bank. Global funds hold a 10th of Japanese and South Korean debt and 15 percent of Thai securities.
The ringgit sank to the weakest level since February last month while the rupiah touched an one-month low last week as a recovery in commodity markets faltered. The two Southeast Asian economies depend on exports of raw materials such as coal, rubber and palm oil.
The ringgit has dropped 4 percent in the past three months to trade at 4.2035 per dollar at 12:41 p.m. in Kuala Lumpur, while the rupiah has risen 0.3 percent to 13,085 per dollar. While the volatility of the two currencies has eased this year, they are still above that of the Philippine peso at 6 percent and Thai baht at 5.7 percent.
“Due to high foreign investment in government bonds, external shocks impact Indonesia and Malaysia more,” said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong. “Another factor is their linkages to the commodity cycle.”
Despite declines in oil and agricultural products beyond the control of both countries, global funds have boosted holdings of ringgit and rupiah bonds this year amid a hunt for returns as $10 trillion of debt around the world has a negative yield. Indonesia’s 10-year bonds pay 7.33 percent, the highest in Asia, while similar-maturity Malaysian securities yield 3.62 percent.
Overseas investors have bought more than $8 billion of rupiah-denominated government bonds this year and their holdings are just below last month’s record 686 trillion rupiah ($52 billion). Malaysian notes have drawn inflows in 12 of the past 13 months and foreign ownership climbed to an all-time high of 214.8 billion ringgit ($51 billion) in October.
“High foreign ownership of bonds is a potential for high volatility,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “Very volatile energy prices exacerbate the vulnerabilities and implied volatility.”