Sunday, February 14, 2016

Malaysia faces extra risk with Zeti departure, slump in gas price

After grappling with a sliding currency and a slowing economy, Malaysian policymakers may have to cope with heightened risks from April – the departure of the country's respected central bank governor and a further slump in the price of gas exports. The ringgit was Asia's worst performer last year, rattled by a political scandal, capital outflows and the slump in global commodity prices. The currency has since recouped some ground to trade up 4% against the dollar so far this year, but some say that the market has not fully taken on board the upcoming risks. Malaysia's liquefied natural gas (LNG) exports have been shielded from the most recent leg down in crude prices but are expected to show sharp drops from April as a more than 40% slump in crude since October is priced in. The LNG contracts are linked to oil prices, but there is a typical lag of three or four months until this kicks in, traders said. "I don't think the market has priced in the fall in LNG prices that may come on the heels of the collapse in oil prices. It's not on people's radar screens yet," said Frederic Neumann, co-head of economics research at HSBC. According to calculations by Nomura, the current Brent crude price indicates Malaysia's LNG export price could fall to US$4.64 (RM19.20) per million British Thermal Unit (mmBtu) by April or May, around a third of what they averaged in 2014, before the oil rout started, meaning a potential hit to export revenues. Already, prices for spot LNG cargoes to Japan have halved to US$7.50 per million British thermal units (mmBtu) between mid-2014 and the end of last year. LNG accounted for 6% of Malaysia's exports in 2015, worth RM47.07 billion, down from 8.3% in the previous year, according to official data. Malaysian government officials declined to comment on the possible risk of a steeper fall in LNG prices. Succession plan As well as being hit by the fall in commodities prices, Malaysia has faced a political scandal around mismanagement of state fund 1Malaysia Development Berhad (1MDB) and by a revelation that about US$681 million was deposited into Prime Minister Datuk Seri Najib Razak's personal bank account. Najib has denied any wrongdoing and the attorney-general said there was insufficient evidence to press charges against him. But alongside the political uncertainty, central bank governor Tan Sri Zeti Akhtar Aziz, who has ably steered Malaysia through global financial crises over the past 16 years, steps down in April. So far no replacement has been named. Contenders put forward in Malaysian media range from the deputy central bank governor Datuk Muhammad Ibrahim to Malaysia's ambassador to the United States Datuk Dr Awang Adek Hussin. None has commented when approached by Reuters. Meanwhile, the ringgit retains its place as one of Asia's most vulnerable currencies to a further collapse in Chinese demand and to higher rates in the United States. It is that confluence of risks that makes analysts wary of who will replace Zeti, and therefore whether the highly regarded Bank Negara will be able to retain its credibility as an independent and cautious central bank. The central bank has also not commented on the succession. The transition should not matter so long as the economy was steady or improving, said Credit Suisse fixed income strategist Ashish Agrawal. "However, if conditions deteriorate once again – risk sentiment is weak, commodities weak and the ringgit is under a lot of pressure, the transition and 'bias' will likely be scrutinised. Credibility is key and markets could get nervous if Bank Negara sounds too dovish. "We would think that this stays in the markets' radar but is discounted only closer to the event depending on prevailing conditions," Agrawal said. – February 15, 2016.]]>

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