RM Rising

Ringgit rising
By CECILIA KOK

cecilia_kok@thestar.com.my
The ringgit has been strengthening against most of the world’s major currencies since early this year. But will this trend sustain?

ZAINAL Azhar has been shopping for the best rates to swap ringgit for euros for his upcoming business trip to Germany. The 40-year-old businessman from Kuala Lumpur says he has been buying euros in phases in preparation for the visit next month.
His friends, Susan Lee and Albert John, are also watching how the ringgit is faring against other currencies. Lee, a financial analyst in her 30s, has been waiting for months to score a “cheaper” vacation to the United States, while sixtysomething John is sending his youngest son to Britain for further studies.

The trio are hoping to get the most bang for their bucks when they exchange their ringgit for other currencies.

So, the recent rise of the ringgit bodes well for individuals like them – not to mention for those who like to shop online for overseas products. Since early this year, the ringgit has been strengthening against most of the world’s major currencies.

On nominal terms, the ringgit has appreciated about 6.7% year-to-date against the US dollar. The ringgit is now hovering at a two-year high against the greenback at 3.19, compared with 3.42 at the start of the year, and last year’s peak of 3.72 recorded in March.

Against the British pounds, the ringgit has strengthened from 5.5 early this year to around 4.9 currently. The ringgit has also risen against the euro from 4.88 early this year to about 4.28 currently.

Against the yuan, the ringgit has reached almost a two-year high over the week to 46.79 sen from 50.15 sen early this year, while against the yen, the ringgit has appreciated 6.9% year-to-date and 8.6% year-on-year to hover around 3.749 per 100 yen.

Other regional currencies are also trending similarly, including the Singapore dollar (which has just been revalued by the country’s government) and the Indonesian ruppiah.

Driving factors
Compared with other regional currencies, the ringgit has nominally gained the most against the US dollar since the start of the year.
Says Affin Investment Bank chief economist Alan Tan: “The ringgit is playing catch-up in the first half of this year as it lagged for most of the second half of 2009. Other regional currencies started gaining strength then.”

As most economists see it, the recent strengthening of the ringgit – and most Asian currencies for that matter – is mainly due to three factors: strong economic recovery and growth prospects for the Asian region, wide interest rate differentials between the US and Asia as some countries in the region have started to normalise their monetary policies and the widespread expectation that China’s lawmakers will allow the yuan to appreciate.

Amid the mounting pressure on China, there are growing expectations that the country will let its yuan appreciate against the US dollar in the second half of the year.
The correlation between the Chinese currency and regional currencies is strong – a rallying yuan will usually lift the regional currencies.
For example, the lifting of the ringgit peg to the US dollar in July 2005. This took place shortlty after China’s central bank revalued its yuan and shifted to a managed float.

(The yuan was pegged at 8.27 per US dollar from 1995 until mid-2005, when it was revalued upwards to 8.11 per US dollar and allowed to float against a basket of currencies, including the US dollar, euro and yen. In July 2008, the yuan appreciated 21% against the US dollar, and its value has since been pegged at around 6.83 per US dollar to this day.)

“The dollar will flow into high-growth regions, driving their currencies to appreciate,” OSK-DMG economist Enrico Tanuwidjaja tells StarBizWeek.
The World Bank expects developing East Asia (which includes Malaysia, China and Indonesia) to register 8.7% growth in gross domestic product (GDP) in 2010.
The Asian Development Bank’s projection is slightly lower at 7.5%.. Malaysia’s GDP growth forecast ranges from 5% to 7%. “The expectations of good growth rates are a major boost to investor sentiment,” says Alan.
More to gain or lose?

A recent CIMB Investment Bank report says that “the interplay of currency revaluation expectations and interest rate differentials will trigger more speculative inflows into the region.”
Malaysia’s move in raising interest rates since early this year has attracted some foreign fund inflows. This has led to the strengthening of the ringgit against major world currencies.

In March, Bank Negara raised the overnight policy rate (OPR) from a record low of 2% to 2.25%. The central bank is expected to raise the OPR again in the months ahead as part of the rate normalisation process.

This will widen the interest rate differentials between Malaysia and other developed nations, especially the US, that have been keeping and intend to keep their rates low for a longer period.

Economists say the widening interest rate differentials will continue to attract private funds to Malaysia as investors seek higher returns.
According to CIMB Investment Bank, the Malaysian equity market could “get a leg up from further OPR hikes.”

Foreign investors are seen to be taking a bet on asset reflation caused by a strengthening ringgit. Market analysts believe that in such instances, the most likely beneficiaries are blue chips such as banking and plantation stocks, among others.

ECM Libra Investment Bank says companies that derive their income mainly from the domestic or regional markets but have input costs or liabilities denominated in G3 (the US, Japan, and euro) currencies will gain.

Those in this category include Tenaga Nasional Bhd, UMW Holdings Bhd, AirAsia Bhd, Malaysia Airlines Bhd, Tan Chong Motor Holdings Bhd, QL Resources Bhd and KFC Holdings (M) Bhd.

Conversely, the strengthening of the ringgit will not bode well for exporters or companies that earn their income mainly in G3 currencies, and have input costs or liabilities denominated in the local currency. Fitting into this category, as analysts point out, are rubber glove and semiconductor companies.

From the international trade perspective, a stronger ringgit tends to make the country’s exports of goods and services costlier for overseas customers. In theory, this would inadvertently lead to lower demand for Malaysia’s products.
But economist Prof Datuk Dr Mohamed Ariff opines that the current appreciation of the ringgit will not significantly impact Malaysia’s export competitiveness because other regional currencies are also rising at the same time.

Says Tanuwidjaja: “Current external demand is driven mainly by intra-regional trade, while demand from developed nations remain relatively weak. The country will benefit more from the lower costs of imports and capital expenditure with a stronger currency.”

Bracing for volatility
Malaysian exports generally have high import content, and this could help mitigate the effects of a stronger ringgit on exporters.


It is estimated that for every RM1 of exports, 70% are intermediate goods imported from overseas. So, a stronger ringgit will help reduce production costs and help exporters maintain price competitiveness.

Will the ringgit’s uptrend continue? Based on current economic indicators, most economists say the trend is unlikely to continue.
They believe the ringgit is already near the tail end of an appreciating trend. They say the upside potential for the ringgit is somewhat limited and that some form of weakness will likely arise in the second half of the year.
Analysts believe the market should brace for volatility ahead as the ringgit’s appreciation is still vulnerable to the movements of international short-term capital.
“The outlook for the first half of the year is clearly an appreciating trend for the ringgit but uncertainties will set in by the second half of the year. Hence, the belief that the strengthening of the ringgit, and other Asian currencies for that matter, will not be sustainable in the latter part of 2010,” says Tanuwidjaja.
Economists believe the growth of Asian economies will be less vibrant in the second half, compared with the first half.
In addition, there is the possibility of policy change by developed nations, particularly the US, as the recovery of their economies gathers pace in the second half of the year.
It is widely speculated that the second half of 2010 will mark the end of the “extended period” for record low interest rates for the US.
Interest rate differentials between the US and other Asian economies will likely be narrower then. This will result in funds flowing back into the country, and the US dollar is likely to react favourably and regain its strength against other currencies.
Taking into account the possibility of this scenario, several local research houses have ascribed a year-end target for the ringgit against the US dollar at between 3.20 and 3.30.
Then again, what about the possible revaluation of the yuan?
Says Alan of Affin: “The market has already priced in such possibility, and even if there’s really a change in the yuan policy, we believe it will be gradual and moderate. We don’t think there will be any sharp or surprise movement in the yuan, so as to minimise the impact on China’s export competitiveness.”
Significantly undervalued?
It is generally perceived that several Asian currencies, including the ringgit and the yuan, are significantly undervalued against the US dollar.
Foreign studies claim that the exchange rate misalignment, in terms of undervaluation against the US dollar at the end of last year, for the yuan was as much as 40.7%.
For the ringgit, it was around 30.5%, while the Hong Kong dollar and the Singapore dollar were misaligned by as much as 32.2% and 24.7%, respectively.
While many Asian currencies have strengthened against the US dollar, their recent appreciation were merely nominal gains. Measured in real terms, that is, after adjusting for inflation, the gains of Asian currencies were only marginal.
The ringgit, in real effective exchange rate, has only strengthened by a mere 1% against the US dollar year-to-date, and less than 3% from mid-2005, when its peg to the US dollar was lifted.
Hence, some quarters argue that there is scope for the ringgit to strengthen further against the US dollar.
But Bank Negara has previously stressed that the value of the ringgit is determined by market forces and that its present value is already reflective of the country’s economic fundamentals.
“To be a domestic and consumption-based economy, a strong ringgit is needed. But let’s be realistic here. Many industries in Malaysia are still export-driven, and a strong ringgit over the short term will definitely hurt them,” says Alan.
He says the ringgit has already appreciated to a level where some manufacturers are beginning to feel a bit uneasy and anxious over the possible loss of competitiveness.
Economists argue that any form of intervention by the central bank in the ringgit exchange should be focused on smoothing out the sharp volatilities that could cause instability in the financial markets, instead of managing the ringgit’s value against other currencies.
Otherwise, says Ariff, “any attempt by the monetary authorities to rein in the ringgit, except under exceptional circumstances, would cause serious price distortions and contribute to inefficient allocation of resources.”
Towards high income
Having a strong currency is in line with any nation’s ambition to be a high-income economy.
“Strong” currency in this sense refers to one that is well demanded and has a stable value, with its exchange rate driven by economic fundamentals.
There are compelling benefits for Malaysia to aim for a stronger ringgit in line with its ambition to be a high-income nation.
For one, a stronger ringgit will make travelling abroad more affordable for Malaysians, hence enhancing their scope for leisure.
A stronger ringgit will also encourage the import of capital goods, which contributes to the innovation and automation of industries in the country.
Above all, a stronger ringgit will help improve the living standards of the people by increasing their purchasing power through cheaper imports and lower inflationary pressure.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says that unless profiteering activities are thwarted, a stronger ringgit may not necessarily lead to cheaper imported goods for Malaysians.
The benefits aside, “a stronger ringgit per se should not be the over-riding objective,” says Prof Dr Tan Eu Chye of University Malaya’s Faculty of Economics and Administration.
“A stronger ringgit must be consistent with the fundamentals of the country’s economy. If fundamentals dictate that the ringgit should strengthen, then it should be allowed to appreciate,” he says.
For the ringgit’s advancement to sustain over the longer term, the implementation and execution of Malaysia’s New Economic Model (NEM) is critical, says Maybank Investment Bank.
Although the first part of the NEM has already been unveiled, many are waiting for more clarification and details of the plan to gain a clearer picture of the changing fundamentals of the Malaysian economy.
The consensus view is that there isn’t any material change in the key economic fundamentals of Malaysia yet. Hence, the unveiling of the second part of the NEM will be critical.
The World Bank says that as long as a stronger ringgit is justified by improved fundamentals, it can help the country gain mileage towards becoming a high-income nation.
“Otherwise, complacency may set in and we may not be able to sustain the high-income status eventually,” says Eu Chye.

Stronger currency, stronger stock market?
By TEE LIN SAY
linsay@thestar.com.my
WHAT does a strengthening ringgit do to our stock market? TA Securities senior technical analyst Stephen Soo says a firm ringgit is a boost to the stock market as it encourages fund inflows.
Although he sees bonds as the main beneficiary of a stronger ringgit, with equities next, he is more bullish on equities for the second half of the year, on the back of the tabling of the 10th Malaysian Plan and the release of more details on the New Economic Model.
“In the last two years, Malaysia has experienced a net outflow of foreign direct investments (FDIs). As the ringgit strengthens, this will at least stop some of the outflows and support liquidity flows. This liquidity will need to go somewhere and stocks will benefit,” says Soo.
Bank Negara data points to an FDI reversal in 2007, with net outflows of direct investments of RM9.14bil. This increased to RM26.06bil in 2008 and to RM14.62bil in the first nine months of last year.
Portfolio investments in Malaysia booked a net inflow of RM8.8bil in the third quarter of 2009 after four quarters of significant outflows.
JF Apex Securities Bhd chief operating officer Lim Teck Seng feels that the recent inflow of funds have not had much impact on the stock market as most of the foreign inflows were for fixed income and not equities.
“A strong currency may not favour stock markets as theoretically, Malaysian stocks have become more expensive. For the moment, foreign funds prefer to enjoy yields rather than the riskier returns from equities,” he says.
Private equity banker Sherilyn Foong says portfolio inflows seem to be faster and nimbler than FDIs. “We’re coming from a low base on the bonds front. My main concern would be if it is, to a significant extent, hot money,” she says.
MCIS Zurich Insurance Bhd head of fixed income Michael Chang shares Lim’s views. “Buying government bonds is probably one of the easiest ways if I am expecting the country’s currency to rise,” he says.
“The risk is deemed moderate and bonds are also fairly liquid investments. Offshore investors can buy into the Malaysian Government Securities (MGS) as it is as good as buying the Malaysian currency,” says Chang.
Long-term hazard
While most people are of the view that a rising currency signals more investments flowing into the country, and therefore contributing to a rising stock market, this is a mere correlation and not a direct impact.
Past studies by ABN Amro Bank and the London Business School have shown that strong currencies do not lead to generous profits from the equity markets.
According to the research, countries with weak currencies saw greater stock returns than ones with strengthening currencies.
A broker from a local house says that a strong currency only offers short term benefit for the market. “Over the longer term, it is not good for an exporting economy and for the stock market,” he says.
Investing in stocks can be viewed as risky compared with other assets. When the central bank raises interest rates, government securities such as the MGS are often regarded as the safest investments and will usually experience a corresponding increase in interest rates.
In other words, the risk-free rate of return goes up, making these investments more desirable and a lot safer than stocks. With stocks, one has to factor in the risk premium as well.
The ringgit has strengthened some 7% to 3.2015 against the US dollar since the beginning of this year. This will impact the earnings of Malaysian exporters and various other sectors of the economy.
Over the short term, exporters such as those in the rubber glove, technology, and electrical and electronics sectors may suffer setbacks.
Says OSK Research director and research head Chris Eng: “A stronger ringgit is better for the country as long as it strengthens gradually. Lately, the ringgit has strengthened rather quickly and this may not give exporters time to pass on (additional) costs to their customers.”
Winners and losers
Rubber glove stocks have come under selling pressure of late as investors worry about a repeat of the share price collapse in 2008, when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glovemakers’ earnings significantly.
Those who remain bullish about the industry contend that the demand for rubber gloves is resilient and that the listed manufacturers, because they are market leaders, will be able to hike selling prices to absorb cost increases.
A stronger ringgit means imports tend to cost less. Manufacturers that rely significantly on imported raw materials stand to benefit and will likely see their margins improve, provided their output is largely sold in the domestic market.
With the US dollar weakening against the ringgit, commodities such as oil and gold, which are bought and sold in US dollars, will be cheaper for purchasers in Malaysia.
Eng says in this context, the local airlines are beneficiaries, as fuel is denominated in US dollars while sales are mostly in ringgit.
“In Malaysia Airlines Bhd’s case, their revenue is mostly derived in Australian and Asian currencies. So they benefit from the strengthening ringgit,” he says.
Others gaining from the surging ringgit include automotive and food-based companies that import products in US dollars but sell them to Malaysian buyers. Companies that have large foreign debts – Tenaga Nasional Bhd for example – will also benefit. On the flip side, MISC Bhd, whose revenue is mostly in US dollars, may be at a disadvantage.
Profit impact
Eng says a stronger ringgit helps control inflation, hence strengthening domestic consumption.
One line of argument is that a strong currency also means that imported raw materials are cheaper, thus lowering inventory cost. This leads to lower borrowing obligations and hence less interest to pay.
Says a senior analyst: “The price of the finished good also goes down and this leads to a lower cost of living. The strength of a currency is an indicator of economic health.”
According to the Big Mac index, the ringgit is 40% below its fair-value benchmark with the US dollar as at March 16 (at 3.3245 per US dollar).
The Big Mac index is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries.
“Based on a trade-weighted index, the ringgit should be fairly valued at 3.23 per US dollar, which is almost close to the current level,” says AmResearch senior economist Manokaran Mottain.
He is forecasting exports to grow by some 7% to 8% and Malaysia’s gross domestic product to hit 5% this year.
Says Chang: “While some exporters lament the stronger currency, a lot of them are importers too and their costs of production have fallen. The most substantial profits are often made in finished goods, not in raw materials.
“Profits made from finished goods are more sustainable as it gives better margins on a longer-term basis. It allow us to move up the value chain.”
An observer says that while raw materials may be cheaper due to the strengthening ringgit, Malaysian exporters will still be in the losing end when selling finished goods to the global market as their products will be denominated in US dollars.

Rising ringgit draws foreign investors
By DALJIT DHESI
daljit@thestar.com.my
THE strengthening of the ringgit against the greenback and other currencies has whetted foreign investors’ appetite for domestic assets, including bonds – at least for the short term.
These investors’ prefer to put their money in Malaysian Government Securities (MGS), which have a lower credit risk compared with corporate bonds.
Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed says the appreciation of the ringgit has triggered an increase in foreign buying of MGS.
“Foreign investors see currency gains as one of the components of investment returns. The larger purchases of MGS relative to corporate bonds are quite understandable considering the extremely low credit risk in this asset class.
“This also translates to lower liquidity risk in MGS in the event investors wish to liquidate their holdings for any specific reason. MGS are also less volatile compared with equities, which should also improve the portfolio returns on a risk-adjusted basis,” he tells StarbizWeek.
Assuming the ringgit continues its bullish run in the coming months, the likelihood of foreign holdings in MGS surpassing its previous peak of 25% is very high, he says.
RAM Holdings Bhd group chief economist Yeah Kim Leng believes there will be an increase in foreign demand for local currency bonds as currency gains will boost the upside potential of investment in ringgit assets.
Bond Pricing Agency Malaysia CEO Meor Amri Meor Ayob says that in the short term, foreign investors will find the MGS market attractive due to foreseeable earnings in the yield differential as well as foreign exchange capital gains.
He says that at the moment, the 10-year US-ringgit sovereign bond yield differential was around 33 basis points (the 10-year US yield is 3.75%, while the 10-year MGS yield is 4.08%).

He believes the confidence among foreign investors in corporate bonds will be boosted but to a lesser extent compared with the stronger credit-backing MGS.
According to HSBC Bank Malaysia Bhd treasurer Piyush Kaul, the inflow of foreign investments will help push yields lower, resulting in lower borrowing costs for the Malaysian Government and corporates.
Hor Kwok Wai, Royal Bank of Scotland Bhd’s head of local markets trading, says the primary driver of foreign interest in Malaysian bonds is the exchange rate gains from a stronger ringgit.
He says interest is usually concentrated in the purchase of Bank Negara bills, but in recent weeks, there has been strong buying in the MGS, especially those with tenures from one to three years. Hor says there could potentially be some reversal if the US dollar/ringgit moves a lot lower moving forward and profit taking emerges.
OCBC Bank (M) Bhd head of global treasury Gan Kok Kim believes that some destabilisation of the bond market can happen should there be any sudden reversals or capital flight due to risk aversion.
Regardless of the rising ringgit, Maybank Investment Bank Bhd managing director and head of debt markets John Chong expects companies will continue to tap the local bond market for financing due to the attractiveness of the bond market.
He says the Malaysian bond market is the third largest in Asia, benchmarked by gross domestic product. The success of the local bond market, Chong says, is facilitated by a sound regulatory and legal framework, robust bond market infrastructure and government support.
On the likelihood of foreign investors shifting focus to private debt securities (PDS), Razlan of MARC says at this point, it is unlikely given the minimum rating threshold of institutional investors.
He says despite more signs of sustainable economic recovery, primary activity in the PDS market remains lethargic with issuance of RM3.8bil in the first quarter of this year compared with RM6.4bil in the first quarter of 2009.
According to Razlan, foreign investors normally stick to well-known institutions such as Petroliam Nasional Bhd (Petronas), Telekom Malaysia Bhd and Sime Darby Bhd, which are rated AAA domestically and whose papers are more liquid for active portfolio management.
However, MARC’s estimates show that new issuances from this highest rating category stood relatively low at RM870mil in the first quarter of 2010 against RM2.8bil in the same quarter last year.
Will the surging ringgit see more companies tapping the local bond market for financing? Not necessarily, according to industry observers.
From an issuer’s perspective, Yeah of RAM feels the rising ringgit will not have any direct impact since the repayment is in local currency.
For Malaysian issuers, Razlan says the movement of the local currency does not have an impact on the decision to tap the ringgit debt market unless they have the option of tapping the non-ringgit market. He says only large institutions such as Petronas have that kind of flexibility.
The local bond market’s volume is driven more by the function of credit quality, credit appetite, liquidity and interest rates, he says .
Meor Amri concurs with Razlan. He says the appreciation of the ringgit bodes well only for corporates that have US dollar-denominated bonds or that intend to issue such papers.
A rising ringgit, Razlan says, also makes it less attractive for foreign issuers to tap the local bond market due to the higher financing cost.

Another question: Is it good or bad for the Ringgit to keep rising this way? And can the uptrend be sustained?
Your politically correct question has not come at a more appropriate time. I like you!
What I'm trying to say is that the weather is very hot these days, and the scorching heat might have burned some brain cells. When tension is high, it is not a bad idea to calm down and look into the more pertinent financial problems.
Talking about the Ringgit, the local unit has risen to a high of 3.19 over the past two days, and has become the fastest appreciating currency in the region over the last three months.
The Ringgit finally has its day!
In March, Bank Negara governor Zeti was always seen with a smiling face. Behind the smiling face we could see the Ringgit fluttering upward.
There are a number of reasons for this, it has been moving alongside the regional big brother: Chinese Renminbi.
Recently, Renminbi comes under mounting pressure from the States. US secretary of the treasury Timothy Geithner made a surprise visit to Beijing lately, but he was not in the Chinese capital for a tea rendezvous with president Hu Jintao.
Even as Beijing said it would remain firm in its position soon after Geithner left, the Chinese currency has started to show signs of easing up.
Yes, with the Renminbi inching up, can the Ringgit stay put?
2. Malaysia's economic data have been pretty impressive of late, and this year's GDP growth, earlier predicted to be in the region of 5%, may look forward to even 6 or 7% according to some foreign bankers.
The first quarter growth has breached the 7% mark, and with exports going robust, we can easily see why Taiwanese investors are complaining of labour crunch.
With economy back on the growth track, interest rates rising in tandem, and foreign funds flooding in to grab the local currency, there aren't reasons for the Ringgit not to rise.
3. The New Economic Model unveiled by the prime minister has set the priority to make Malaysia a high-income country.
In a country where its currency is undervalued, the people's income couldn't go a lot higher. The appreciating Ringgit will be instantly reflected on the per capita income.
As for whether it is good to have a strong Ringgit, a strengthening currency will inevitably perk up export costs, eroding our export competitiveness.
But, if all regional currencies appreciate at the same rate, especially with Renminbi taking the lead, then Malaysia will not be disadvantaged.
At the same time, an appreciating Ringgit will make imported products cheaper, which will benefit businesses who need to acquire imported raw materials, machinery as well as consumer products.
A stronger Ringgit should also be good for those with children studying abroad.
In general, currency appreciation is a good thing for most Malaysians, and should have a catalytic effect on the government's effort to increase the national income and enhance the competitiveness of local businesses.
The facts that Bank Negara has not stepped in to check the rising exchange rate and that Zeti is recently seen with a brilliant smile should serve to reassure all that the latest spike is not just momentary but can be sustained for some time. (By TAY TIAN YAN/Translated by DOMINIC LOH/Sin Chew Daily)



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