Belt Tightening Spurs Malaysia, Indonesia Currencies

Oct 28, 2013

Belt Tightening Spurs Malaysia, Indonesia Currencies

By Ewen Chew

Budgets that emphasize spending cuts to curb current-account deficits announced in Indonesia and Malaysia ahead of the weekend are already paying off with stronger currencies. Both the rupiah and the ringgit fell sharply this summer on fears that their growing current-account deficits would trigger credit-rating downgrades. Since May 1, the Indonesian currency had fallen by as much as 16%, while Malaysia’s currency fell as much as 8.8%, though the Malaysian currency had clawed back some losses: it was down 3.7% since May 1 as of Thursday.The rupiah rallied as much as 2.2% Friday reaching 10,910 to the U.S. dollar after the government released its 2014 budget, which aims to reduce next year’s deficit to 1.5% of gross domestic product compared with this year’s estimate of 2.4%.

Some of the money saved, mainly on subsidies, will be channeled into infrastructure such as public transport, and the government forecasts overall spending in 2014 will increase by 6.7%, much slower than the 16.5% rise estimated for this year.

The economy still faces risks: Elections next July could mean a change of government, for example, and Finance Minister Chatib Basri has trimmed the government’s forecast for economic growth to 6.0% from 6.3% previously. But for now, the rupiah is recovering after months of more or less steady decline.

The ringgit rose by as much as 0.9% to 3.1220 against the greenback on Friday, after Prime Minister Najib Razak announced his government’s plan to reduce Malaysia’s budget deficit to 3.5% of gross domestic product from an estimated 4.0% this year.

Malaysia has been running a budget deficit for the past 15 years, a bugbear that made some investors uncomfortable when exports declined in June. Fitch Ratings cut Malaysia’s credit outlook to negative in July, citing increasing debt levels and a lack of fiscal reform.

Aside from pledging to keep expenditure increases modest and gradually expanding the range of subsidies targeted for reduction—on Friday, it scrapped a sugar subsidy effective the following day—Malaysia’s government also plans to increase revenue, by implementing a goods-and-services tax of 6.0% starting in April 2015.

Though ratings agency Standard & Poor’s has said these proposals won’t have an immediate impact on Malaysia’s sovereign rating, it at least shows that concrete action is being taken to address the fundamental reasons some investors have turned bearish on the ringgit. Indonesia’s cost-cutting is having a similar effect, giving both currencies further room to gain.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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