Stronger ringgit may not excite the market
Ng Wai Mun 
Ambank Research expects the ringgit to trade around RM4.25 against the US dollar in 2018 with a year-end target of RM3.95

The ringgit is projected to appreciate by 5.7% to touch RM4 against the US dollar from the current RM4.23 within the next few months on the back of improving oil prices. This will bring some cheer to Malaysians, especially importers and those paying for goods and services in the greenback.

Nevertheless, investors question how a relatively stronger ringgit dollar will impact the economy, with views ranging from neutral to negative.

“The first thing I expect to happen if it touches RM4 (against the US dollar) is foreign investors will sell to capitalise on gains from foreign exchange,” an economist tells FocusM.

He points out that the local bourse has appreciated by about 6% this year, and thus selling down at this point means the foreign investors will benefit from both the market and ringgit appreciation.

“The RM4 mark has become more of a physiological level. In 2015, when the ringgit was depreciating, many dreaded to think what (would have happened) had it hit RM4. Now that it is way above that, the RM4 level appears to be so welcomed,” the economist adds.

He says a selldown by foreign investors has recently eased. MIDF Research in its Sept 25 report said after three consecutive weeks of foreign fund inflows, global investors cleared their positions.

It said foreign investors offloaded RM478 mil from Bursa Malaysia in mid-September, breaching the RM400 mil level for the first time this year.

Such large-scale foreign selldown last happened at the end of 2016. “If foreign investors consider selling at such exchange rate (of RM4.23), the selling may even be heavier if the ringgit were to strengthen to RM4,” the economist says.

Lee does not rule out a foreign selldown if the ringgit hits RM4

On the ringgit touching the RM4 mark, JF Apex Securities head of research Lee Chung Cheng says: “If the hypothesis holds true, we do not rule out the possibility of a foreign selldown on the local bourse by some short-term funds. However, we do not think the impact would be severe.”

“Since August 2015, both the ringgit and US dollar have depreciated against most major currencies except for the sterling pound,” says the economist.

The greenback has depreciated by some 4% against the euro and 9% against the yen since August 2015, versus the ringgit’s depreciation of about 10% and 13% respectively.

However, the ringgit and the US dollar appreciated by 12% and 18% against the pound respectively during the same period.


Muted impact from stronger ringgit

“Even if the ringgit were to appreciate, not necessarily to RM4, higher exports and lower imports should persist as the local note has weakened against most major currencies compared with August 2015,” says the analyst.

Companies that rely heavily on imports of raw materials are still expected to benefit even if the ringgit were to appreciate further.  

When the ringgit depreciated to RM4 in August 2015, total exports in the following quarter (Q4) were lower at US$48 bil versus Q4 2014’s US$58 bil despite the stronger ringgit then. Based on historical data, a stronger ringgit does not necessarily mean weaker exports.

“If the ringgit were to remain at around the current level against the US dollar, there would be no significant change in our export competitiveness. Malaysia is currently benefiting from a major global upturn in world electronics demand, which has resulted in very strong growth in the exports of electronics manufactures,” says IHS Markit Asia-Pacific chief economist Rajiv Biswas.

Rajiv cautions there will be some upside risks for the local currency to appreciate further

Malaysian electrical and electronics output rose 10.5% year-on-year in July, with exports growing strongly at 28.3%.

Rajiv adds that total exports rose 31% boosted by manufacturing exports’ strong growth of 33% and mining goods by 27.5%.

Against this backdrop of soaring exports experienced by various sectors, Rajiv believes the current strength of the ringgit is not expected to significantly affect the strong export sector performance in the near term.

“Our forecast is the ringgit will remain above RM4 (to the US dollar) over the next 12 months due to a US Federal Reserve (US Fed) rate hike in December 2017.

“Three US Fed rate hikes (are expected) in 2018 to support the US dollar in global currency markets due to rising money market yields on the currency deposits,” Rajiv says.


Upside risks

However, he cautions there will be some upside risks for the ringgit to appreciate further, including the sustainability of the upward oil price momentum and continued improvement in the Malaysian macroeconomic indicators.

“The ringgit is expected to trade in the range of RM4.10 to RM4.30 against the US dollar in 2018. The US Fed is expected to raise US policy rates four times between now and December 2018, increasing money market flows into the US dollar due to rising yield,” says Rajiv.

Meanwhile, Ambank Research expects the ringgit to trade around RM4.25 against the US dollar in 2018 with a year-end target of RM3.95.

Ambank, in its October report, said the ringgit has been performing well so far this year underpinned by undervalued currencies. It adds that there is room for the ringgit to appreciate further against the US dollar on the back of macro fundamentals such as net inflow into equities, improved foreign shareholdings in Malaysian Government Securities and prudent monetary policies.

With a firming ringgit outlook, the research house foresees challenges for competitive export-led industries.

The impact will depend on whether the decline in their export proceeds can be mitigated by cheaper costs of imported inputs as a result of a stronger ringgit.

“But it may not be the case for export-dependent industries that are price-takers in the global markets sourcing their inputs locally and [paying] in local currency.

“Such industries risk facing strong margin pressures. If firms source their inputs from abroad and supply their final products locally, they will gain from a strong ringgit,” added the research house.

“Those adversely affected would undertake steps to hedge their foreign currency exposure and may need to restrategise or even venture into other opportunities.

“Since exchange rate movements are transitory in nature, those benefiting should not be complacent (but must) improve their operations to cope with the more challenging times when the situation reverses.”

RHB Research also expects the ringgit to recover gradually over time as it moves closer to reflect its fundamental value.

“We believe the ringgit had overshot on the downside previously. This was due to the strengthening of the US dollar (following) Donald Trump’s victory in the US presidential elections and earlier uncertainties, after the central bank introduced measures to curb speculation by offshore traders, which has shown improvement of late,” it said.

It explained the appreciation of the ringgit in recent weeks was largely due to stronger oil prices amid expectations that the Organisation of the Petroleum Exporting Countries would favour extending the supply cut. It said the ringgit was also supported by the country’s large trade surplus in September.

However, the research house believes volatility in the ringgit could still persist in the near term given the expectation of further US Fed rate hikes and shrinking of the nation’s balance sheet.

It added that vulnerability from large foreign holdings of fixed income instruments in the country and volatility of oil prices could cause volatility to the local currency.

This article first appeared in Focus Malaysia Issue 258.