Malaysia funds debts make defending ringgit tougher

[KLSE] Malaysia's task in propping up Asia's worst- performing currency just got a lot tougher. The cost of options protecting against further ringgit declines approached a 1 1/2-year high on speculation 1Malaysia Development, the state investment fund, will need a bailout. The currency is already languishing at its weakest level since 2009 as the oil-exporting nation suffers amid sliding crude prices.

"The market remains wary of 1MDB's ability to repay its debt," Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group, said Feb 24. "The ringgit is vulnerable to the near-term outlook for oil prices. A recovery is difficult." A weaker currency is a concern for Malaysia because it pushes up the cost of servicing the second-highest external debt burden among Asia's developing nations. 

Further losses in the ringgit may hasten an investor exodus from Malaysian assets and hurt the government's efforts to rein in its budget deficit. The ringgit has tumbled 7.4 per cent in the past three months, the most among 11 Asian currencies tracked by Bloomberg, and touched a six-year low of 3.6460 a dollar on Feb 23.