The unthinkable has happened. Ringgit has fallen beyond the crucial 4.0000 level in late morning trade against the US dollar (at the time of writing). At 11.03am on August 12, 2015, the Ringgit was at 4.0060 to the US dollar, the weakest since the Asian financial crisis in 1998.
Fears about a weak Ringgit has reached a fever pitch, and some Malaysians are worried and angry about the situation. But are these worries and anger justified?
With the devaluation of China’s yuan for the second consecutive day, markets and currencies were sent reeling, and Malaysia was not spared. As the second biggest economy in the world, China’s economic slowdown had spurred the central bank to devalue the currency to export its way out of the situation.
However, the yuan is not all to blame for the Ringgit’s downward spiral. On a year-to-date basis the Ringgit, the worst performing Asian currency, was down 13.33%. This was followed by the Indonesian rupiah, South Korean won and Thai baht at 9.88%, 8.35% and 6.99%, respectively.
A rising or sliding Ringgit affects different groups in our economy differently. A stronger Ringgit against the currencies of our trading partners would typically result in cheaper imports for our consumers, and more expensive exports to foreign buyers.
This means a strong Ringgit will benefit the local consumers buying imported goods, but bad for local exporters selling their products internationally. Depending on various factors, such as capacity utilisation and unemployment, the circumstances may make a recession worse.
When it comes to the sagging Ringgit, there are also pros and cons. When the Ringgit falls, employment in export-related industries will likely benefit, as demand from abroad increases. However, the higher domestic prices likely associated with export products due to the increased demand will reduce that benefit to some degree, and the higher prices for imports will reduce it even more.
Here are four different groups in the economy that are directly affected by the sliding Ringgit, either negatively or positively, and what they can do to protect themselves from the imploding currency:
1. Domestic producers
Domestic businesses who create and sell goods and services, where parts and components are acquired, manufactured and sold domestically, will likely not feel any direct impact of a strong or weak currency. For example, restaurants offering local cuisine and traditional massage centres.
As long as the business expenses are incurred locally, such as acquiring manufacturing materials and talent are all done within the country, there should not be any direct impact to the bottom line.
However, some domestic producers can be negatively impacted by a weak currency if the goods and services they sell locally, partially or entirely originates from a foreign economy. For example, if you purchase parts or materials in US dollar, you will probably see a significant hike in your production cost.
Some of these companies include vehicle manufacturers who may be importing parts and components from countries like Japan and South Korea.
EITA Resources Bhd, which imports steel, copper and electrical components from Germany, China and Japan to manufacture its elevator systems, said raw material prices have risen.
“It is more than a double whammy and outlook is definitely not good,” Fu Wing Hoong, the company’s group managing director, told The Business Times. “Prices for our products will have to be adjusted.”
Even Tenaga Nasional Bhd (TNB) does not escape the fluctuations in the Ringgit with its foreign currency borrowings. As of February 28, 2015, TNB had debts totaling RM25.6 billion, of which 11.3% or RM2.9bil, were denominated in US dollars. A sliding Ringgit will increase its foreign debt obligations.
Other industries who suffer in this economic climate are the airlines and telecommunications industry.
Malaysia External Trade Development Corporation (Matrade) chief executive officer Datuk Dzulkifli Mahmud advised SMEs and exporters to use more local raw materials whenever possible to reduce production costs and losses from foreign exchange rates.
Other ways to manage production cost better was to hold off buying any capital goods like machineries and equipment from abroad, especially when buying from an economy that has a stronger currency compared to Ringgit.
2. Local exporters
The selling of goods and services occurs not just domestically, but internationally as well. Malaysia wasranked the 23rd world’s largest exporting country in 2014.
Those who create and sell goods and services to foreign consumers in other economies will probably benefit from a weak currency.
Local exporters are positively impacted by the weakened Ringgit due to the lower cost of production, resulting in likely increase in the demand from abroad. What this means is, they pay for cheaper production in Ringgit, while selling products in higher valued currency, like US dollar, netting in higher profit.
Furthermore, if more foreign consumers can afford what domestic producers are selling, then there will be more sales. Simply put, a weak Ringgit benefits domestic producers selling to foreign consumers.
Glovemakers in the country will most likely benefit from this as their input costs are sourced and denominated local, and exported in stronger currency.
According to Lim Wee Chai, chairman of Top Glove Corp., a weaker currency makes Malaysian goods cheaper overseas and boosts the value of exporters’ overseas sales at companies such as Top Glove.
“Our margins will be positively impacted as exports are US dollar denominated,” Lim said. “However, we cannot depend too much on the currency as it will fluctuate.”
In a report on The Star in July 2015, Malaysian exporters were urged by Matrade to consider hedging the level of Ringgit back then, which was considered the best level against the US dollar, besides increasing productivity by using local raw materials.
3. Foreign investors
A strong or a weak currency matters most importantly to export and import of the economy as the prices change in foreign currencies. However, people think the similar logic can be applied to capital flows in the economy as well. The truth is, a strong Ringgit does not necessarily mean more foreign capital.
A foreign investor can get back his investment at the same value, if the currency remains that strong or weak. In other words, as long as the currency rate does not dip from its initial rate at the time of investment, it does not matter to the investor if the currency is strong or weak.
What matters is whether the currency strengthens or weakens during the investment period. For example, if an American investor invest into Malaysia now, he/she will see profit if the Ringgit appreciates. However, if Ringgit weakens later on, the investor would see a loss.
The currency depreciation may attract investors who see costs of doing business in the country getting cheaper, said Jalilah Baba, president of the Malaysian International Chamber of Commerce & Industry.
With that said, it doesn’t all just hedge on the Ringgit’s value, foreign investment sentiment is also affected by other factors. Although Malaysia’s medium-term prospects seem attractive, investment sentiment towards Malaysian assets has been overshadowed by domestic political developments, said Khoon Goh, a senior foreign-exchange strategist at ANZ.
International investors are selling Malaysian stocks with foreign funds pulling out RM11.7 billion in shares. Nomura, a Japanese financial holding company, noted that foreign ownership levels of equities are less than 20% of the total, a multi-year low and the lowest of several regional peers.
The weak sentiment is likely to persist as the political landscape in the country will most likely remain unchanged.
4. Consumers
With the latest bad news to hit Malaysians, the weakening Ringgit has left consumers with a smaller purchasing power. With GST implemented, the downward slide of Ringgit is considered a double whammy for the already financially struggling population.
Consumers are discovering their money isn’t going as far as it used to, eroding confidence at a time when the economy needs it the most.
Malaysians looking to purchase and consume goods and services from foreign producers will have to pay more. This does not just apply to imported goods, but also domestically produced items that use parts and components or even expertise from foreign economies.
To make matters worse, a weaker currency can drive inflation up when economies import goods from countries with stronger currencies. It will also make travelling overseas a bad idea.
To safeguard their finances, some Malaysians have been stocking up on US and Singapore dollars which are seen as safer and more stable currencies as speculation on the continual weakening Ringgit continues.
Spectrum Forex in Nu Sentral revealed that they currently face a Singapore dollar shortage. However, elsewhere, there are many who were selling their US bills too.
Other ways one can protect oneself from the weakening Ringgit is by investing in a currency-hedged unit trust fund, or invest in an exchange-traded fund. These funds remove the risk for you, so you only have to worry about stock market returns.
Whether you’re an average investor who wants to mitigate currency risk or a more experienced one who wants to take advantage of currency fluctuations, the forex world is only for those who can stomach risk.
The Government has no plans to peg the Ringgit to the US dollar, like what was done during the 1997 Asian financial crisis.
The drastic measure of pegging the Ringgit would only be beneficial if Malaysia was a low-cost production country, said Wan Suhaimie Saidie, the senior vice-president of research at Kenanga Investment Bank. Since then, we’ve moved towards becoming a higher skilled industry.The economic situation is markedly different from the last time we pegged our currency in 1998.
Bank Negara Malaysia’s governor, Tan Sri Zeti Akhtar Aziz assured, in a Wall Street Journal report, that the country’s foreign-exchange reserves remain significant and the current account remains in surplus.
However, according to a report by The Edge Markets on August 10, the country’s international reserves have fallen to US$96.7 billion as of July 31, from US$100.5 billion on July 15 – the lowest since September 2010.
The central bank has been struggling to slow the decline by selling dollars and buying Ringgit since June in an attempt to stem the currency’s slide but this can only be a temporary measure.
There doesn’t seem to be a light at the end of this downward spiraling tunnel that our currency is currently in. Nomura doesn’t appear to expect the Ringgit to rise any time soon neither does anyone else. It would be prudent for Malaysians to tighten their belt further as we may be in for a long ride on the tumbling Ringgit.
