Sat11252017

LAST_UPDATESat, 25 Nov 2017 9am

Ringgit Depreciation Is Not All Gloom And Doom: Experts Discuss The Benefits

YESTERDAY, the ringgit sank to a 16-year low, even breaching the 3.80 barrier, which has not been seen since the currency peg was lifted in 2005. The ringgit dropped 0.8 percent on Monday (July 6) to 3.8088 against the US dollar in Kuala Lumpur, the lowest level since May 1999.

Many were quick to blame Malaysia's political uncertainty triggered by the nation's leadership crisis but in reality, most Asian markets were thrown into turmoil after Greece voted against Euro-backed financial reforms.

Share prices tumbled across the Asia-Pacific on Monday after Greece voted against further austerity measures in a referendum raising fears it could be forced to exit the eurozone. Only China bucked the trend due to internal stabilizing measures introduced by the Chinese government.

The ringgit is currently the worst performing currency in Asia – with almost 5 per cent loss against the US dollar, according to a recent Reuters report. Before Monday's record setting low, the ringgit had plunged to a nine-year low against the dollar on June 8 before reversing its course later in the day. 

Last Wednesday provided some temporary respite as Malaysia’s sovereign ratings, which have been on Fitch Ratings’ negative outlook since July 2013, have been upgraded to stable due to the country’s improved financial position.

Previously, Malaysia was widely expected to have its credit rating downgraded to BBB+ by Fitch in its half-yearly review, but the firm maintained Malaysia’s local currency rating at A, with outlook revised to stable.

All this might be a fascinating read to finance professionals but what about the average Malaysian? They are more worried about whether daily household necessities will cost even more and whether their children's education fees will sky-rocket.

Earlier this year, a local online news portal reported that Minister in the Prime Minister's Department Datuk Seri Shahidan Kassim had said all government-sponsored students had been receiving their allowances in the currencies of the country in which they were studying while their tuition fees were paid directly by the government to the education institutions to allay fears that the students will encounter financial difficulties due to the depreciating ringgit.

But privately sponsored students will have to bear the burden on their own. As Malaysians find they have to stretch their ringgit even harder after the GST and petrol price hike, the plunging value of their already stretched ringgit brings more bad news as the nation prepares to head into the festive season.

Is there a silver lining to be found and what should we do to turn this adversity into an opportunity?

There's Always Opportunity In Every Crisis

Contacted last Thursday, Executive Director of Malaysian Institute of Economic Research (MIER) Dr Zakariah Abdul Rashid (pic) said the significant fall of the ringgit against US dollar over the past few weeks has been unusual, saying the retreating global crude oil prices has had a significant impact on the national currency.

Zakariah, when asked about the positive side of the ringgit’s depreciation said: “Any opportunities derived from the weakening of ringgit would only persist in the short run, although there are certain industries that will reap the benefit from it.”

“For example, the depreciation of ringgit will help boost tourist arrivals in Malaysia for a short period of time. When the ringgit’s value weakens, foreign tourists with stronger currencies are able to spend more in our country. In short, Malaysia becomes much more affordable to them.

“Besides, it will also help to boost export-oriented industry as exports become cheaper with the weakening of the national currency as well as to promote wider import substitution activities in Malaysia,” he told Malaysian Digest.

When it comes to economic growth, foreign direct investment (FDI) has been a key feature of the world economy. The trends of economic globalization and greater economic interdependence have rendered FDI flows one of the most valuable sources for national development for most countries, including Malaysia.

Besides, Malaysia’s FDI has been on the upswing in recent years. According to CEIC’s World Trend Database, Malaysia’s FDI figure was 3.09, an increase of 0.51 from 2.58 on December last year.

On whether the ringgit’s devaluation will help to accelerate foreign direct investments, MIER’s Zakariah remarked: “Although the exchange rate plays an important role when it comes to FDI, but temporary fluctuations in the exchange rate will give little or no impact to foreign investors because FDI is a long-term capital flow.”

“However, it all depends on the fluctuations of the exchange rate (whether it is short-term or tends to last longer),” said Zakariah. 

"When a foreign investing company wants to make overseas investment, either by acquiring shares or by setting up a subsidiary company in the foreign country, it is strongly dependent on the general economic conditions of the country they want to invest in, not only on the stability of exchange rate," he observed.

Meanwhile, Prof Dr Shazali Abu Mansor (pic) senior lecturer at Universiti Malaysia Sarawak (UNIMAS)’s Faculty of Economics and Business also shared with Malaysian Digest how the currency devaluation can be beneficial to the economic growth in the near term.

"The weaker currency will encourage export-driven industry as exports become cheaper and more attractive to the international investors. In addition, it will also help to boost our tourism industry as foreign tourists tend to spend more in our country amid the weakening of the national currency," he said.

Shazali said the domestic market becomes more attractive with the weaker ringgit and brings more investors to invest in our country and bring more inflows into Malaysia's economy as well as to create more employment opportunities in which it will benefit the county in return.

"Temporary fluctuations of ringgit is an usual phenomenon but we can't afford to let our national currency to weaken further as it would bring detrimental effect to the economic growth," he added.

Make The Most Of Short Term Opportunities In Ringgit Devaluation

Ask any local businessman how is business these days and the most likely response is a sigh followed by a resigned shake of the head to indicate the gloomy outlook, a perception shared by many Malaysians.

Over the past year, it is with no doubt that the depreciation of our national currency has caused the loss of confidence among foreign investors and tempting inflationary pressures but one must be note that the weakening ringgit could also in some ways, lead to a positive spillover effect for various industries.

On June 8, Minister of International Trade and Industry Datuk Seri Mustapa Mohamed said that a weaker ringgit will benefit Malaysia in terms of boosting exports and foreign investments but imports will be expensive, but saying that this situation would not be long as the Malaysian economic fundamentals remain strong, the local currency would continue to strengthen.

Despite the ringgit's depreciation, he was quoted as saying that Malaysia has recorded an increase of 152.6% to RM33.6 billion worth of investments in the first quarter of this year from RM13.3 billion in 2014.

In order to discover more and delve deeper on the subject, Malaysian Digest spoke to Hong Leong Investment Bank Bhd economist Sia Ket Ee (pic) as he shared his views with us.

“There have been a lot of misconceptions recently on the impact of weakening of ringgit on the broader economy in which many foreign investors tend to associate the fact that our equity market is highly correlated to the performance of ringgit.

“The linkage is always there because whenever there is a perception of the weakening of ringgit, foreign investors tend to sell down their equity holdings in our country. If we look at the real economy, the fact is that when the ringgit is weaker relative to our regional peers, the export sector tends to gain competitiveness, particularly in terms of pricing,” Hong Leong’s Sia told Malaysian Digest.

Patently, cheaper currency means exports become cheaper and more attractive to the international market in which the US market where the favourable USD/MYR exchange rate can potentially lead to a steady upturn in demand for our country’s export.

Take, for instance, local glove manufacturer and exporter, Top Gove has recorded an increase in profit before tax by 19.9 per cent due to the sharp devaluation of ringgit and the cheaper raw material prices.

Concurring with the facts, he explained: “In fact, the structure of Malaysia’s trade is quite diversified and certain industries such as electronic and electrical, rubber glove, furniture and wood tend to benefit from the weaker ringgit.”

Sia, nevertheless, said the benefit is not going to be immediate, saying that some exporters will use this opportunity to expand their market share and hence, producing higher yields.

Asked the positive impacts of the weakening of ringgit, he remarked: “Our country will not immediately reap the benefits into the broader economic numbers because the initial fear of investors on [the performance] of stock market always sets in first before anything else.”

Despite that, he believes the situation does not pose any major hindrance to the national economic growth, given the fact that companies from export-oriented sectors have started to post stronger than expected corporate results after more than nine months of ringgit depreciation.

“Another positive impact from the weaker ringgit is that it will contain or deter the volume of imports since it becomes more expensive. Thus, from the country’s current account point of view, it is something positive as it will help to propel the current account surplus,” he said.

Echoing the thoughts of MIER’s Zakariah on the relationship of the ringgit’s depreciation and the foreign direct investment (FDI), Sia said FDI is not something straightforward as foreign investors would take into account many factors such as the infrastructure, labour force and industrial support and linkages, among others, before making any investment.

"At the moment, from a macro perspective, our country's economy is still doing considerably good in terms of financial and interest rate stability. After all, Malaysia still manage to achieve an annual economic growth of between 4.5 to 5.5 percent," he stressed further.

What Comes Up Must Go Down, And So Is The Reversal

As pointed out by the experts above, short-term fluctuations of our currency will not affect medium and long-term economic prospects in Malaysia, after all. With an optimistic outlook for our country’s economy, a weakening currency can be beneficial to us if we can find a way to turn this adversity into an opportunity.

Pic: kinibizPic: kinibiz

As Hong Leong’s Sia aptly puts: “The Central Bank of Malaysia (BNM) is allowing the global factors as well as the capital flows to determine the direction of the ringgit. They are not going to do anything to alter the direction [of the ringgit] as BNM believes that the domestic banking system and the financial sector is mature enough to go along with the volatility of the national currency.

When asked the currency predictions for the ringgit, he said: "From a country's point of view, we can't afford to have a currency that continues on the depreciation mode because it does reflect the poor economic health as well as the balance of payments (BOP) of a country."

Last week, Sia has said in a report in The Edge Markets that the Fitch Rating upgrade might be among factors that could help the ringgit strengthen to 3.55 in the second half of this year (2H2015). As for the ringgit performance for the rest of this year he noted, "we maintain MYR range forecast at RM3.55-4.00/US$ for 2H2015, with a mid-point forecast of RM3.70/US$."

"From a broader international capital flow landscape, the US dollar is expected to maintain its strength in the near term. While from the domestic perspective, the economic growth of the country is expected to experience a slowdown due to the implementation of Goods and Services Tax (GST) in the second quarter as well as the government's fiscal deficit," before adding that there have been a lot 'noises' recently on the wide range of fiscal issues.

He further said that: "What's more important for the government now is to disseminate the right information about the economic situations in Malaysia as there has been some misinformation and heated discussions going on, particularly the misconception in the handling of funds in some government-related companies and agencies such as the debt-ridden 1Malaysia Development Berhad (1MDB).

"Since investors do not like uncertainty, the government ought to disclose the actual facts and information on the national economic conditions and let the investors make their decisions," added Sia.

-mD