WHILE importers and consumers will feel the pinch when the ringgit weakens, moderate depreciation is not a bad thing overall, because exporters stand to benefit.
"Businesses that will benefit from a weaker ringgit are those that have their revenue stream in US dollars or other strong foreign currencies, while their cost base is in ringgit. These would be the plantation companies. During the 1997/98 Asian financial crisis, the plantation companies performed decently because of this," says Gan Eng Peng, who is head of equities at Hwang Investment Management Bhd.
The plantation sector has been lacklustre so far this year, due to weak crude palm oil (CPO) prices. However, since CPO is mainly priced in ringgit, it will become more attractive to major palm-oil-consuming countries than the other vegetable oils, because these are mainly priced in US dollars and euros, notes a report by Kenanga Research.
The boost in CPO prices will translate into better earnings, but the share prices of the planters will not necessarily improve because of negative rating revisions across the equity market, the research house says.
A report by Credit Suisse points out that a weaker ringgit will deter investors from holding commodities denominated in the currency. However, according to Kenanga, plantation stocks are unlikely to see a sell-off because the commodity sector has lagged behind the benchmark index. IJM Plantations Bhd and TSH Plantations Bhd are Kenanga's top picks due to their strong fresh fruit bunch growth.
CIMB Investment Bank regional head of economics Lim Heng Guie says the rest of the sector — for example, timber, crude oil and liquefied natural gas, will also enjoy a windfall in terms of high export receipts in ringgit terms, since most commodity prices are quoted in US dollars and Malaysia is a price taker.
For the electrical and electronics sector, which accounts for more than half of Malaysia's exports, typical gains from a weaker ringgit could be muted this time around, says Rajiv Biswas, IHS Global Insight's chief economist for Asia-Pacific.
"Most of Malaysia's East Asian competitors, such as Indonesia and Thailand, have also seen their currencies depreciate against the US dollar since May, so Malaysian exports may not see much improvement in competitiveness versus other key Asian competitors."
At the same time, a depreciating ringgit will increase the prices of imported intermediate goods for Malaysia's large manufacturing sector, he says, adding that Malaysian manufacturers in key sectors such as electronics, are a part of complex supply chains, with a large proportion of imported components.
"Nevertheless, the ringgit's depreciation against the US dollar will help electronic exports to the US, which account for 54% of total local exports to the latter. Overall though, Malaysia's commodity and manufactured exports are not expected to see big gains in competitiveness at current exchange rates," remarks Rajiv.
However, CIMB IB's Lim believes chemical and rubber product manufacturers that export most of their goods will benefit, because their import content is low.
Service sector exports, especially tourism, business process outsourcing, medical and education, will also be positively impacted by a weaker currency, says Rajiv.
"A depreciation of the ringgit against the US dollar will be particularly favourable to Malaysia's large BPO industry, as many of the multinational corporations that outsource to Malaysia are US-based. Rising wage costs in Singapore and Hong Kong are also helping increase Malaysia's competitiveness as an Asia-Pacific BPO hub. A weakening ringgit will spur a shifting back of office functions from Singapore and Hong Kong to Malaysia," he explains.
On the other hand, a weaker ringgit will adversely impact importers, as well as companies that have borrowings denominated in US dollars.
"Companies with high imported costs or foreign debt, and the revenue of which is predominantly in ringgit terms, will suffer from the currency's weakness. The obvious ones are airline, utility and automobile stocks," says Gan.
A weaker ringgit will be a drag on Tenaga Nasional Bhd, the shares of which recently hit a five-year high of RM9.30 each before closing at RM8.99 on August 1. The coal that Tenaga sources is typically denominated in US dollars, and coal accounts for almost half of its fuel costs. On top of that, Tenaga has to contend with RM2.7 billion worth of borrowings denominated in US dollars.
At the same time, airlines like Malaysian Airline Systems Bhd and AirAsia Bhd will have to contend with more expensive fuel costs, which are denominated in US dollars.
"We also feel that if the pace of the currency's correction is too fast, it will be bad for the entire risk market, as investors generally do not like volatility," Gan says, adding that the market could face a downside risk.
Be that as it may, the ringgit's depreciation is not expected to have an adverse effect on consumer inflation, particularly because declining world commodity prices are mitigating import price pressures, says Rajiv.
While costs at home are not expected to go up in a hurry, Malaysia's middle class, particularly those whose children are studying abroad, will feel the squeeze. Besides the US, the UK is another popular destination for Malaysian students, but costs have shot up with the ringgit falling 7.95% against the pound sterling, to 4.972 since May 22.
On a more optimistic note, parents with children studying in Australia will get a breather as the Aussie dollar is depreciating even faster than the ringgit. A slowdown in China and the resulting slump in commodity demand has pushed the currency down by 8.67% to 2.899 against the ringgit this year alone.
A weaker ringgit could also stem the flow of Malaysian funds into foreign investments — for example, property, as they become more expensive. Last year, Malaysians were among the leading buyers of London property.
Conversely, the ringgit's weakness could stop foreign investors from buying properties here in the near term, but they will return because a cheaper ringgit means cheaper Malaysian assets, says Gan.
Ringgit the weakest among Asean currencies
As the possibility of quantitative easing (QE) tapering by the US Federal Reserve becomes more certain, currencies across Asia and Asia-Pacific have been weakening against the greenback. But the ringgit stands out for falling the most against the US dollar, as domestic concerns mount.
Since May 22, when the Fed first announced QE tapering, the ringgit has depreciated 7.31% and stood at 3.24 against the greenback — the sharpest decline in Southeast Asia, at the time of writing. The Philippine peso was the next weakest (-5.7%) against the US dollar, followed by the Indonesian rupiah (-5.09%) and the Thai baht (-4.82%).
If this trend continues, the US dollar will appear to be the safest currency to hold, because the flow of funds returning to the US will only intensify if QE tapering kicks off. It is worth noting however, that the Fed, after its most recent meeting, has indicated that monetary easing is still required for the foreseeable future.
Closer to home, one good way to hedge against a weakening ringgit could be to seek refuge in the Singapore dollar — the one currency in Asean that is proving resilient to weakness. It has depreciated a marginal 0.43% against the US dollar since May 22.
While the Singapore dollar does react to external newsflow, it leverages the city-state's stable economy and maintains its safe haven status among its Asian peers, amid foreign exchange volatility.
In fact, the Monetary Authority of Singapore's (MAS) policy for the currency is to allow a modest and gradual appreciation. A recent decline was due more to the strength of the greenback than the Singapore dollar's weakness.
It is worth noting that Singapore uses its foreign exchange rate as a monetary policy tool. MAS manages the Singapore dollar exchange rate against a trade-weighted basket of currencies of the republic's major trading partners and competitors. The composition of the basket is reviewed and revised periodically, to take into account changes in Singapore's trade patterns, domestic price pressures and the external environment.
"MAS may also intervene in the foreign exchange market to prevent excessive fluctuations in the exchange rate," it says on its website.
The downside of holding Singapore dollars is that interest rates on the island are hovering around zero.
Other than the Singapore dollar, East Asian currencies like the Korean won and Chinese yuan have managed to hold their ground against the advance of the US dollar. The won has depreciated mildly by 0.87% against the US dollar since May 22, after depreciating sharply earlier in the year, while the yuan, officially known as the renminbi, has remained virtually unchanged.
The Hong Kong dollar, which is pegged to the US dollar, has also moved little since May 22.
Although these currencies have performed better against the greenback, the respective economies, except China, are growing at a slower pace than Malaysia.
MAS expects Singapore to grow 2.3% this year, Bank of Korea estimates the Korean economy to expand 2.8%, while Hong Kong's government sees its economy grow between 1.5% and 3.5%. In comparison, Bank Negara Malaysia recently forecast Malaysian growth at 4.8%.
Other than the yen, which has been wilfully depreciated by the Japanese government, a currency that did worse than the ringgit was the Australian dollar. It has fallen 8.14% against the US dollar since May 22. The weakness of the Aussie dollar is due to the slowdown in China, which, in turn, has slowed demand for Australia's commodities.
But while the Aussie dollar has suffered, the New Zealand dollar has thrived, although both currencies have historically been closely-linked. The Kiwi has gained 2.51% against the US dollar since May 22.
The Kiwi was up 11.6% against the Aussie dollar, with the two economies headed in opposite directions. China's demand for NZ food exports remains strong, but its need for minerals, of which Australia has plentiful, has been declining as it restructures its economy.
This story first appeared in The Edge weekly edition of August 5-11, 2013.