The Ringgit Fell Below RM3.30 Against The US Dollar

The ringgit fell below 3.30 against the US dollar for the first time in eight (Aug 2008) months, pressured by foreign sell down on local stocks and bonds.

Economists expected further pressure on the ringgit, on the increasing likelihood that Bank Negara would keep interest rates at current levels as prices of crude oil and other commodities declined.

The weak ringgit will help local companies boost their export earnings, but make import of food products more expensive.

Bank Negara said (Aug 2008) the country’s foreign exchange reserves at US$125.1bil as at end-July 2008 showed the first monthly decline since August 2007. Late last month (July 2008), the central bank kept interest rates unchanged, despite faster inflation in June 2008.

The weakening equity market is expected to weigh down on investors’ sentiment, and hence lead to either lower inflows or outflows of portfolio investment”. The drop in foreign reserves reflected the large outflow of portfolio investments, which offset the continued inflow of export proceeds. Meanwhile, the foreign sell-off on Bank Negara’s issued papers and Malaysian government securities was evidenced since May 2008.

Industry observers are expecting foreign investors to continue unwinding their holdings in fixed income securities, given the ringgit will likely weaken further on the back of a strengthening US dollar.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the movement of the ringgit reflected the movement of the major currencies. The central bank had seen the US dollar strengthen across the board while other currencies, including the major currencies, depreciated. This is just an international development and will monitor it closely. Any intervention that we undertake is to maintain orderly market conditions. That is their priority. They will not be intervening to affect the underlying trend of the currency.

In recent months (Before Aug 2008), the EU central banks are expecting to raise interest rates, hence saw the euro strengthening. However, since the fallout from the US subprime mortgage crisis had affected the EU economies more than expected, this had limited the EU central banks’ flexibility to increase nterest rates.

The US dollar rose against almost all major currencies on 09th Aug 2008. The euro declined against the greenback for a fourth week on rising prospects the European central bank would keep lending rates as growth slows down in the region.

According to a news report, EU central banks, unlike the Federal Reserve, were slow to respond to a potential slowdown, refusing to cut interest rates as they focused on fighting inflation. The sentiment was that the US economy would again be able to leave the crisis behind very quickly.
Fundamentally, if there was a pullback in the ringgit, Malaysia’s exports should be more competitive. However regionally, the currencies were also weakening against the greenback.

Companies with large borrowings will have to pay more?

Companies with large exposure to US dollar borrowings, including Tenaga Nasional Bhd, Telekom Malaysia Bhd (TM) and TM International Bhd (TMI), may be the most affected by the strengthening greenback.

As at March 31 2008, TM’s US dollar borrowings totalled RM6.17bil, Tenaga (RM6.03bil) and TMI (RM2.65bil). If the dollar continues to strengthen further, companies with large US dollar borrowings would have to pay more to service their loans.

Exporters and plantation companies are expected to benefit from the ringgit’s recent slide (July – Aug 2008) against the US dollar as it cushions the margin squeeze felt from inflation and falling commodities’ prices.

The ringgit’s weak (Aug 2008) performance has largely been attributed to the US dollar’s gains against major currencies. A slower exports would result in further declines in the ringgit.
The weakened ringgit would be favourable towards plantation companies, such as Sime Darby Bhd, which had seen a downtrend in crude palm oil prices.

Other beneficiaries of the ringgit decline included companies with exposure overseas, especially those in the oil and gas sector which has businesses contracted in US dollars.

At a basic level, exporters would benefit from the ringgit decline but not by very much as margins are already thin due to inflation. Even if goods (sold) are cheaper, overseas demand is lower as a result of a slowdown in the European Union, China, and the US. So, the weaker ringgit may not help improve volume significantly. The setback in the local currency would, however, paint a slightly better picture for the palm oil sector as it helped to stabilise the declining price of the commodity.

Malaysian exporters are susceptible to headwinds and won’t escape the erosion in global demand.