Does Malaysia’s ringgit face 1997 all over again?

Kiyoshi Ota | Bloomberg | Getty Images

The sell-off in the Malaysian ringgit, already among the world's worst performing currencies, may run further amid a toxic mix of shaky economic fundamentals and the spreading of what is being called the country's worst-ever political crisis.

The ringgit has fallen around 40 percent over the past year, with the U.S. dollar fetching around 4.34 ringgit on Thursday. That's the Malaysian currency's weakest against the greenback since late 1997, when the dollar at one point fetched as much as 4.88 ringgit.

"There remains significant downside risk even after the sharp ringgit correction," Hak Bin Chua, an analyst at Merrill Lynch in Singapore, said in a note Wednesday, noting that he sees little comfort from claims Malaysia is much stronger than in 1997, when it took a wallop from the Asian Financial Crisis (AFC).

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"Some leverage indicators are much higher than in 1997, including household, public and external debt," Chua noted, citing data showing household debt as a share of gross domestic product (GDP) is almost double at 86 percent, compared with 1997's level of 46 percent. He noted public debt as a percentage of GDP is also significantly higher at 54 percent, up from 31 percent in 1997.

"The ringgit depreciation has not strengthened exports or improved the trade balance at all," he said, adding he also expects foreign investors will begin unwinding their holdings of Malaysian government bonds once the Federal Reserve begins increasing interest rates, expected later this year. Foreign investors currently own 47 percent of Malaysia's rinngit-denominated debt that is currently outstanding.

"The current currency crisis may not be a repeat of history and 1997, but it sure rhymes and is probably far from being over," he said.

Chua sees another factor as set to weigh on the currency's prospects: "The current political crisis, sparked by the 1MDB scandal, is the worst in Malaysia's history."

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The 1Malaysia Development Berhad (1MDB) fund, launched in 2008 to promote economic development, has been in the limelight for months, amid allegations of false auditing, huge debt and, more recently, financial fraud. In July, the Wall Street Journal published a report alleging nearly $700 million flowed from the fund to Prime Minister Najib Razak's personal bank account. Najib has repeatedly denied any wrongdoing. Singapore and Switzerland have both suspended bank accounts tied to 1MDB and in the U.S., media reports said the Federal Bureau of Investigation (FBI) is investigating as well.

Analysts at HSBC said it's difficult to quantify the impact of political uncertainty on the currency so far, but in a note earlier this week, they said, "politics will become more significant for the currency if policy risks and economic costs start to materialize," especially with ratings agencies monitoring government spending.

But HSBC also doesn't believe the ringgit's 1997 levels necessarily offer any signal on just how far the ringgit could fall.

"It is possible for dollar-ringgit to go into uncharted territory," the HSBC analysts said, something other emerging market currencies have already done. "This time around, the broad U.S. dollar is appreciating also on its own merits," while during the 1990s, the greenback's strength was largely due to emerging market weakness, it noted.

, for one, has touched an all-time low against the greenback amid steep drops in the prices of its commodities exports and a drop off in demand from major trading partner China as well as domestic political turmoil.

HSBC doesn't believe the ringgit has reached its worst-case scenario yet. The bank is concerned that prices of palm oil, which accounts for around 8 percent of Malaysia's exports, are falling. Palm oil sales are denominated in ringgit, meaning a weaker ringgit doesn't improve the country's trade figures.

The weaker ringgit may already be boosting inflation in the country. Credit Suisse noted August inflation came in at 3.1 percent on-year, above its forecast for 2.8 percent, largely due to higher food prices as the weaker currency affected import prices. The bank expects the U.S. dollar will be fetching 4.50 ringgit in three months.

--Saheli Roy Choudhury contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1