KUALA LUMPUR (April 20): The ringgit may weaken in the near term, possibly on the back of capital outflows by foreign investors, in the scenario of a change of government after the 14th General Election (GE14).

In its Global Research report, the HSBC Group pointed out that the opposition party had suggested that it would, among other things, review the Goods and Services Tax (GST), fuel subsidies and China's investments in Malaysia.

“The GST and subsidy reforms shored up Malaysia's fiscal finances, thereby helping the sovereign to avoid a ratings downgrade and support foreign investors' confidence in Malaysian assets and the ringgit.

“Meantime, China's foreign direct investments (FDIs) now comprise nearly half of total FDIs into Malaysia, which have become all the more important for the ringgit against a shrinking current account surplus,” it said.

 Hence, a potential reversal of these developments may thus result in a weaker currency, at least in a knee-jerk reaction, it said.

In the scenario of a status quo Barisan Nasional (BN) victory in GE14, the ringgit’s strength would continue to be driven by Bank Negara Malaysia’s restrained foreign exchange (forex) intervention policy and ringgit-supportive forex regulations.

“Our base case is for the US dollar-ringgit to fall to its fair value of 3.70 by year-end because of mandatory conversion by exporters amid gradual forex reserve accumulation by the central bank,” it said.

A pick-up in FDI and portfolio inflows from foreign investors relieved by the prospect of policy continuity under BN’s governance would certainly help too, it said.

“Even if the theory behind past local note weakness post-election is right, and residents would indeed like to acquire more forex or foreign assets because of future political risks, we note there are now prudential limits in place since December 2016 that should cap such capital outflows,” it added.

Hence, a crucial domestic determinant of the ringgit's outlook in either election outcome is the central bank’s forex policy, the report pointed out.

“The main (upside) risk to US dollar/ringgit forecast is that this policy, which has so far been geared towards being supportive of ringgit appreciation, changes for whatever reason.

“The other upside risk is external. Trade tensions between US and China are rising and may, in worst case scenario, result in disruptions to global trade and heightened risk aversion in global financial markets,” it said.

Given Malaysia's openness to trade and its exposure to demand from both US and China, the ringgit would likely be among the more affected currencies, it said.