Whither the ringgit? US Inflation & workforce are the bigger problems

 

WITH the ringgit passing the RM4.50 mark to the mighty US dollar, questions have been asked as to where the ringgit is headed, as it has dropped almost 9% year-todate and at a level last seen during the Asian Financial Crisis in 1998 – almost a quarter of a century ago.

“See you at five” – a term coined during the crisis time, is being re-played like a broken record as speculation mounts that the ringgit will hit the unthinkable five handle to the dollar in future.

However, as we are aware, the ringgit is not to be entirely blamed for its weakness, as there are other factors that are playing out.

If one were to analyse carefully, the ringgit is in actual fact firmer against the Japanese yen by about 12.5%, up 7.2% and 7.1% against the British pound and the South Korean won respectively; between 0.9% and 3.8% higher against the Chinese yuan, Thai baht, Philippine peso and the euro. 

 

Other than the US dollar, the ringgit is only weaker against the Australian dollar, Indonesian rupiah, and the regional champion, the Singapore dollar by between 1.1% and 4.5%. 

 

Hence, overall, for the performance year-to-date, the ringgit may look like a weak currency as we are fixated on comparing the ringgit’s performance against the US dollar as well as the Singapore dollar, but in actual fact, the ringgit has outperformed at least seven other major and regional currencies.

The strength of the US dollar cannot be denied as the Federal Reserve (Fed) is battling hard against high inflation prints and is left with no choice but to raise the benchmark Fed fund rate (FFR).

Having raised 225 basis points or bps so far this year, the Fed is now poised to increase the FFR by another 75 bps in the September Federal Open Market Committee (FOMC) meeting next week, with odds of 100 bps too not being ruled out at all.

This was after the headline and core US inflation prints came in at 8.3% and 6.3%, and ahead of the market forecast of 8.1% and 6% respectively. Should the FOMC raise the FFR by 75 bps next week, the market is pricing in another 75-bps hike in the November meeting and a 50-bps increase in the December meeting.

This will take the FFR to 4.25%4.50% and bring the 2022 rate hikes to 425 bps. With the US 10-year treasuries at 3.43%, the yield spread between the Malaysian benchmark 10-year Malaysian Government Securities has narrowed to just 72 bps from 209 bps at the start of the year.

Indeed, the divergence in the monetary policy adopted by the Fed has a significant impact on the ringgit too.

Another key factor that the ringgit seems to be suffering is the correlation between the ringgit and the yuan. Both currencies removed the dollar-peg in July 2005, with Kuala Lumpur following suit right after Beijing’s move. Since then, the ringgit seems to have a high correlation with the yuan. 

Year-to-date, although the ringgit is up 0.9% against the yuan since the start of the year, the ringgit’s movement against yuan has been relatively flat over the past five years with the local currency down by 0.4% compared with a year ago, and 1.2% over the past five years.

The yuan has also been weaker against the US dollar, as the Chinese economy has not been doing well since China’s zero tolerance towards Covid-19 cases, which has resulted in major cities or regions going into short-term lockdowns. The yuan even hit a fresh two-year low, flirting with the seven handle against the US dollar.

Other factors too are playing out on the ringgit weakness, although we are fortunate that we continue to run a current account surplus, we have been running budget deficits for nearly a quarter of a century.

This has ballooned our federal government debt level to the extent that we have even moved the needle to ensure we remain within the redefined debt/gdp ratio.

Malaysia also has an over-dependence on foreign workers, which continues to weaken the ringgit with a high level of foreign remittances as well as a deficit in our services account and net outflows from primary income.

In addition, Malaysians investing abroad is another strain on the ringgit, while errors and omissions too can be a large contributor to the ringgit’s weakness as well.

As measuring a currency is all relative, it is understandable when the general public refers to the ringgit’s strength or weakness as “only” when compared with the US dollar and to a certain extent, the Singapore dollar.

Chart 1 shows the relative performance of the ringgit against the major global and regional currencies.

It can be seen that much of the weakness against the US dollar and the Singapore dollar occurred this year itself, while against the pound, euro, yen, won, baht and peso, the ringgit has been gaining ground not only year-to-date but also over the past year and five years.

Against the Australian dollar and rupiah, the ringgit has recouped its weakness against the two currencies with a stronger performance year-to-date.

While the picture looks respectable over the past five years, data going back over a 10-year and 15-year period, suggests that the ringgit has significantly underperformed.

Chart 2 shows the performance of the ringgit vis-à-vis the major global and regional currencies.

As seen in Chart 2, over a 10-year horizon, ie, from mid-september 2012 to the present, the ringgit is only firmer when compared with the yen (19.1%); Australian dollar (5.1%) and the rupiah (5%).

Against all the other currencies, the ringgit is weaker by between 6% against the pound to as much as 49.1% against the US dollar.

Over a 15-year horizon, the ringgit was also seen as weaker as it was down by between 4.5% against the yen and Australian dollar to as much as 40% against the Singapore dollar.

The ringgit is only firmer against the pound (25.6%); rupiah (18.1%); won (13.3%) and the euro (6.2%).

Another comparison is the performance of the ringgit since it was de-pegged on July 21, 2005.

Here one can observe that while the ringgit is down 41.3% since then against the yuan and 19.3% against the US dollar, it is firmer against other major currencies, rising by 1.9% against the euro, 6.4% against the yen and 21.3% against the pound.

Regionally, although the ringgit is up more than 20% against the rupiah, the ringgit is down significantly against other regional currencies.

This is sharpest against the Singapore dollar with about 42.7% depreciation, 35.7% against the baht, and 16.5% against the peso.

As currencies are valued on a relative basis by comparing one currency with another, an alternative approach is to look into the real effective exchange rate (REER) which takes into account the weighted average of a currency in relation to an index or a basket of other major currencies. The weights are based on comparing the relative trade balance of a currency against each country in the index.

REER data is provided by the Bank of International Settlement (BIS) monthly and Chart 3 summarises Malaysia’s REER performance since the de-pegging days, plotted against the US dollar.

The chart shows a highly correlated chart whereby the correlation was observed at -0.95, suggesting that REER has a significant impact on the value of the US dollar-ringgit exchange rate.

A tough question as the valuation of a currency is always seen as a relative point to another currency while the strength/weakness of one currency can also be attributed to the relative weakness/strength of another currency.

Nevertheless, if one were to gauge the REER as a reference point, the ringgit is effectively undervalued by approximately 16.8%, as a neutral REER should be at the 100.00 index point level.in

At this level, the ringgit’s fair value is approximately RM3.89 to the US dollar. However, the REER has always been trading below the 100 index point level, except for a brief occasion between April 2010 and August 2011; in February/march 2012; and between November 2012 and May 2013.

In July 2011, the ringgit traded at its post de-pegging high of RM2.9385 before succumbing to weakness due to multiple reasons.

Bank Negara’s international reserves begin to weaken from a peak of Us$141.4bil (or Rm435.5bil) as at May 2013 at a time when the ringgit was trading at RM3.08 to the dollar and the REER was at its peak of 104.11 points.

However, if one were to take the average REER of 93.34 points over the past 17 years, the ringgit has a fair value of RM4.17 to the dollar.

Hence, while the ringgit has weakened considerably against major currencies, especially since its de-pegging days, the local currency remains an undervalued currency by between 8.9% and 16.6%.

While the ringgit is seen as weak against the US dollar and Singapore dollar, it has outperformed against other major currencies like the euro, pound and yen.

Over the longer term, Malaysia needs to address the serious structural issues that have made us less competitive than our neighbours. Top of the list is education reforms which should be addressed quickly as we are losing out our young bright minds via migration.

One of Malaysia’s biggest losses is the brain drain that has benefitted many countries, especially Singapore, Australia and even as far as the United States.

The second issue that Malaysia needs to address is to attract right-minded high-skilled knowledge workers as well as the ability to attract the right investment dollars into Malaysia.

The spill-over effect from an investment-friendly country is multiple, as it can help to lift Malaysia’s competitiveness not only in traditional fields but new robust industries related to the technology and services industry.

Third, Malaysia needs to address the current low wage levels of Malaysians as we cannot be a high-income nation if 50% of Malaysians are earning less than RM2,100 per month.

There must be a concerted effort to increase wages, which will indirectly address not only the rising cost of living but increase the affordability as well as tax revenues of the government.

Fourth is our fight against corruption. It is a known fact that a low ranking in Transparency International’s Corruption Perception Index is highly correlated to the cost of doing business.

Malaysia needs to make greater efforts to weed out the corrupt practices, both in the government and in the private sector to enable Malaysia to be better position to not only attract the right global investors but to reduce the cost of public spending, which eventually leads to a lower cost to consumers.

Finally, it’s the politics and public policies that come with it. We must not only be investor friendly but must avoid flip-flopping policies that can cause serious irreparable damage to our reputation in the eyes of the world.

Public policies too must be cleverly crafted with the right inputs from all stakeholders to enable Malaysia to march forward as one.

Only then, we will see a stronger ringgit not only against the currencies that Malaysia has outperformed but also against the mighty US dollar and Singapore dollar

  by StarBizPANKAJ 4. KUMAR Source link

 

 Top stories

The Star 

US Inflation? The workforce is the bigger problem

 https://www.thestar.com.my/business/business-news/2022/09/17/inflation-the-workforce-is-the-bigger-problem

---

Advisor Perspectives

US Inflation? The Workforce Is the Bigger Problem - Articles

 https://www.advisorperspectives.com/articles/2022/09/14/inflation-the-workforce-is-the-bigger-problem

 

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Global currencies weaken in currency war against super US dollar; exporters gain

Central banks making moves to check appreciating currencies against US dollar

A number of central banks have been making moves to shake up their currencies over the past few months.

Faced with slowing global growth and lower inflation – disinflation or deflation in a number of countries – central banks started taking action primarily by cutting interest rates or injecting liquidity into the system.

From Japan increasing its monetary stimulus to Singapore putting the brakes on its currency’s appreciation against a trade-weighted basket of currencies, stemming currency appreciation has led to talk that a currency war could be brewing.

Using the value of currencies to boost trade-heavy economies has been the flavour, as global economic growth slows.

The International Monetary Fund cut its global growth outlook from 3.8% to 3.5% this year and with growth easing in China, Europe and a number of emerging economies, giving support to such economies has been the focus of governments.

The European Central Bank instituted its own quantitative easing (QE) policy on Jan 22 to get growth going in the European Union.

The effectiveness of that policy has been questioned, but the immediate result was that the euro, which has been weakening against the US dollar, continued to fall against the greenback.

With Japan flooding the market with liquidity to get growth and inflation going with its own QE, the result has been a marked weakness in the currency.

The yen’s steep depreciation against the dollar, according to reports, is causing uneasiness in South Korea, which competes almost head-to-head with Japan in the export markets.

What is allowing countries that have taken action to cut their interest rates has been the slowing inflation.

The steep fall in crude oil prices since June last year to below US$50 a barrel has eased inflationary pressure worldwide, as energy is usually the biggest component of inflation. It’s been reported that over the past six months, 18 out of 50 MSCI countries have cut rates.

The Reserve Bank of India, which has an inflation targeting policy, cut interest rates this month. India, along with Denmark, Switzerland, Canada, Egypt and Turkey, has cut interest rates this month itself.

That was followed by Singapore’s move to slow its rise against a basket of currencies, which saw the Singapore dollar continue its recent drop against the US dollar.

Falling inflation was the primary reason for the Monetary Authority of Singapore (MAS) to make its pre-emptive move to slow down the appreciation of its currency by reducing the pace of increase. But quite a number do not pin that move as a significant competitiveness boost.

“The adjustment does not translate into a massive competitiveness impact,” says Saktiandi Supaat, Malayan Banking Bhd’s head of foreign exchange (forex) research based in Singapore.

MAS’ next policy statement will be due in April where it could give some clarity on the competitiveness angle, but the drop in the Singapore dollar against the greenback does help to boost inflation, which is expected to be lower than had been earlier estimated. The previous outlook was for a -0.5% to 0.5% rise in inflation.

A slower rate of appreciation would also help Singapore’s economy, which is already dealing with cost pressures from a tight labour market where the unemployment rate was a meagre 1.6%.

Furthermore, with non-oil domestic exports reportedly dropping for the past two years, a weaker Singapore dollar will help, especially when exports to China and the United States have fallen on a year-on-year basis.

Pressure is also emerging in Thailand, where the stronger baht is also not helping with exports, which dropped 0.4% last year.

Finance Minister Sommai Phasee was recently reported to have said that the Thai central bank should “in theory” lower borrowing costs, and that exports are under pressure from a stronger baht.

Fundamentals back appreciation

The Philippine peso and the baht are two currencies in this region that have in recent months seen an appreciation against the dollar. The reason for this is that the fundamentals of these economies have improved.

“The Philippines is not reliant on commodities as much as Malaysia, Indonesia and Thailand and that is the biggest driver of its currency,” says a currency strategist in Singapore.

“It just registered its strongest gross domestic product (GDP) growth over three years since the 1950s.”

The Philippine economy grew by 6.1% last year after expanding by 7.2% in 2013.

Thailand, recovering from floods and political unrest, has also been a flavour for foreign investors since stability returned.

Its stock market in US dollar terms is now bigger than Bursa Malaysia and one of the reasons for the currency’s rise is the drop in oil prices.

The fall in crude oil prices is expected to have the biggest economic benefit to Thailand and the Philippines among countries in this region, according to Bank of America Merrill Lynch.

“Lower oil prices have not resulted in any sizeable GDP growth upgrade as yet for emerging Asia, in part because of slowing global growth outside the United States.

“Lower oil prices have, however, improved the trade surplus significantly, supporting the current account balance and FX reserves positions.

“Lower oil prices have also resulted in a sharp drop in inflation, particularly in Thailand, the Philippines and India, which has allowed central banks to stay accommodative. Emerging Asian countries will likely see a boost to GDP growth in the range of +10bp to +45bp with every 10% fall in oil prices, if the oil price drop was purely a supply shock,” it says in a note.

The low-inflation environment will also allow central banks in this region to become more accommodative.

“Lower crude oil prices and loose global monetary policy will likely keep inflation lower in 2015 with rising probability of rate cuts in Asean,” says Morgan Stanley in a note.

How low will the ringgit go?

The past three months have been a volatile period for global currencies and no more so when it comes to the ringgit, which is the second-worst performing currency in Asia against the US dollar over the past 12 months after the yen.

Directly, the drop in crude oil prices has affected the fundamentals of Malaysia and carved a chunk out of government revenue, as receipts from crude oil production account for slightly less than 30% of income.

With revenues depleted, the Government has revised its budget for this year to take into account crude oil averaging US$55 a barrel in 2015 from an earlier projection that it would average US$105 a barrel when the budget was announced last October.

The revised budget also led to a slight increase in the fiscal deficit to 3.2% of GDP from an earlier projection of 3%.

That percentage is lower than the 3.5% target for 2014.

Apart from fiscal discipline, the ringgit’s fortunes have been loosely linked to the price of crude oil.

With this July marking the 10th year when the ringgit peg to the US dollar was lifted, the decision to remove the RM3.80 to the US dollar peg was to ensure that the ringgit reflected the fundamentals of the economy.

Prior to that decision, the price of crude oil had started to rise, delivering valuable additional revenue to the Government.

When the peg was lifted, brent crude oil was trading at US$55.72 a barrel, and over the years, the ringgit loosely tracked the value of crude oil, often appreciating against the dollar when crude oil prices were high and weakening when crude oil prices dropped.

Anecdotally, the ringgit gained strength against the dollar when oil prices soared and approached the RM3 to the dollar mark when crude oil hit more than US$140 in 2008.

It dropped in value as crude oil prices retreated from there, and as crude oil prices went up again and stayed at elevated levels for a prolonged period, the ringgit then crossed the RM3 level into the RM2.90 range.

Forex strategists say sentiment does affect the movement of a currency, but it moves in parallel with the fundamentals of an economy. With Malaysia’s fortunes closely linked to the price of crude oil, it is inevitable that the thinking of the country’s fundamentals will also change.

“If energy prices continue to drop, then it will hurt the ringgit,” says a forex strategist based in Singapore.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz recently said the ringgit, which is currently trading at multi-year lows against the US dollar, did not reflect Malaysia’s strong underlying fundamentals.

“Once the global events settle down and stabilise, the ringgit will trend towards our underlying fundamentals,” Zeti told reporters at an event.

Apart from lower crude oil prices, the ringgit has also been hurt by capital outflows.

Malaysia’s forex reserves in the first two weeks of January were at its lowest level since March 2011 and foreign investors held 44% of Malaysian Government Securities (MGS) as of the end of last year.

Analysts say while foreigners have sold off a chunk of government debt, the remaining are not expected to do so as long as they are making a decent return on their holdings. The rise in the value of the 10-year MGS will give support to their holdings.

A number of forex analysts think the ringgit will not slip below RM3.70 to the US dollar, but some do admit they did not think it would be trading at the current level of around RM3.63 a few months ago.

“If it does go to RM3.80, then people will get panicky,” says one forex analyst.

By Jagdev. Singh Sidhu The Star/ANN

Semiconductor and rubber glove makers to gain from weak ringgit

Kenanga Research believes that the semiconductor industry will stay resilient with the global sales continuing to show healthy momentum.

THE decline of the ringgit is generally viewed as a problem for the economy but there are always two sides to the story.

Exporters with high local ringgit-denominated content and strong external demand are the obvious winners as they are expected to benefit from the weakening ringgit.

The winners are said to be the semiconductor and technology, rubber gloves and timber-based sectors. The share prices of a number of those companies have already factored in the benefits to their business from the weaker ringgit after the currency started its decline,which was more pronounced since the beginning of the fourth quarter of last year.

On the semiconductor front, Kenanga Research says believes that industry will stay resilient with the global sales continuing to show healthy momentum. Bottom-fishing is recommended as a strategy especially with the current risk-reward ratio less favourable following rich valuations in some counters.

“Typically, first and last quarters of a calender year, the earnings for the semiconductor players are seasonally weaker.

“That said we see any price weakness in these stocks as opportunities to accumulate as the earnings shortfall could be made up by the seasonally stronger second and third quarters on the back of the resilient industry prospects,” it says in a recent report.

Screening through the semiconductor value chain, Kenanga Research sees Vitrox Corp Bhd, being the leading solution providers of automated vision inspection systems to continue benefiting from the increasing complexity of semiconductor packages, which requires enormous inspection.

The research house is sanguine over OSAT (outsourced chips assembly and testing) players such as Unisem (M) Bhd. Inari Amertron Bhd is among the research house’s top pick.

PIE industrial Bhd managing director Alvin Mui says the group would see its sales rising this first quarter.

“But this is due to the new box built products we are doing for the medical equipment segment.

“The weakened ringgit will of course boost our revenue and bottom line,” Mui says.

Meanwhile, Elsoft Research Bhd chief executive officer CE Tan says the weak ringgit has boosted orders for its LED test equipment for the first quarter of this year.

“We expect to perform by a strong double digit percentage growth over the same period last year,” he says.

Tan says the LED testers the group produces are niche products with competitive pricing.

Rubber gloves players have seen strong price appreciation since late last year. Maybank IB Research likes Kossan Rubber Industries Bhd due to its stronger earnings growth in financial years 2015 and 2016, underpinned by the full contributios of its latest three plants.

Meanhile, JF Apex Securities mentions Latitude Tree, Poh Huat and Heveaboard among the timber-based industry stocks that can benefit from strengthening US dollar against ringgit.

The US market is the biggest for the industry which will gain from cheaper ringgit-denominated local content and stronger US economic growth.

The losers from a weaker ringgit, JF Apex Securities Bhd senior analyst Lee Cherng Wee mentions, are automotive players which import a lot of parts especially for completely-knocked down vehicles.

Lee says counters such as Tan Chong Motors and UMW Holdings are likely to be affected.

RHB Research in a recent report says about 60% of Tan Chong’s manufacturing cost of sales is transacted in foreign currency (80% in US dollars) which RHB sees as a risk.

“Continued US dollar strength will crimp margins that will not be offset by a weaker Japanese yen,” it says.

Lee also predicts the consumer sector players with high imported content in dollar terms could risk slimmer margins coupled with sluggish consumer sentiment due to goods and services tax.

MIDF Investment Research analyst Kelvin Ong said he foresees banking groups with higher foreign shareholdings like CIMB Group Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Public Bank Bhd as banks that can be impacted by the weaker ringgit.

“Foreign shareholding may slip if the domestic currency continues to weaken. The Fed’s tightening of the interest rate turns out to be more aggressive than expected, and crude oil prices continue to be on a downward trend. This will impact valuations of banks, but on the flip side, it will present buying opportunities for investors on a more attractive valuation,’’ he says.

By Sharidan M. Ali and David Tan The Star/ANN

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