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).
"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.