New 1MDB fears whack the ringgit

Sanjit Das | Bloomberg | Getty Images

Asian currencies were broadly stable on Wednesday as China's monetary stimulus injected some calm into tense markets, but not the ringgit.

The Malaysian currency nosedived nearly 2 percent against the greenback in late morning trade to seventeen-year low for the fourth day running , unable to get any relief from China's interest rate and reserve requirement cuts that stabilized other emerging market currencies on Wednesday.

Fresh developments regarding state investor fund 1Malaysia Development Berhad's (1MDB) saga were to blame for Wednesday's plunge. Abu Dhabi's International Petroleum Investment Co (IPIC) is reportedly considering exiting a plan to help restructure 1MDB's debts, Singapore's Business Times reported earlier in the day.

1MDB, known for its investments in Malaysian power assets, is wholly owned by the government, which makes Prime Minister Najib Razak's administration responsible in the case of a default.

In May, IPIC signed an agreement to inject $1 billion into 1MDB to help pay off a $975 million loan to a syndicate of international lenders due in September. The agreement was hailed by Kuala Lumpur as a momentous step towards reducing 1MDB's total $11.6 billion debt overhang and advancing the fund's long-awaited restructuring plans that are due to be implemented early next year.

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In a statement on Wednesday, 1MDB denied that the binding agreement with IPIC was off, adding that it remains in discussions to conclude the [$1 billion] transaction. That saw the ringgit pare losses to around 0.7 percent but still trade below the key 4.3 level per dollar.

Malaysia's ringgit hovers near 17-year lows

Wednesday's report adds to 1MDB's ongoing legal woes . The fund is currently being investigated by local officials for alleged corruption after the Wall Street Journal reported in July that $700 billion was transferred to Prime Minister Najib Razak's personal bank accounts. This week, Swiss officials launched criminal proceeding against two 1MDB executives for suspected money laundering.

Worries that 1MDB will default has dogged foreign investor sentiment since late last year and helped push the ringgit 22 percent lower year-to-date, making it Asia's worst-performing currency.

"Everybody's revising down their forecasts for the ringgit...Right now, we're in a panicky situation and nobody wants to touch it, " Jesper Bargamnn, head of trading for Nordea Bank in Singapore, told CNBC.

But the net oil exporter's finances are already strained amid lower oil prices and sliding currency holdings. International reserves are currently at their lowest level since 2009, making Kuala Lumpur especially vulnerable among emerging markets to a looming U.S. interest rate hike and Chinese economic slowdown.

If the Business Times report is true, the exit of IPIC would sap remaining investor confidence in 1MDB and likely usher in fresh blows for the ringgit, which has already been buffeted by China's recent renminbi devaluation and an external debt pile that tops 60 percent of gross domestic product (GDP).

Since Kuala Lumpur has quashed the idea of imposing capital controls, hiking interest rates seems to be the only option available for authorities to stem the currency's sharp depreciation, said Mirza Baig, head of foreign exchange and interest rates strategy for Asia at BNP Paribas.