Press statement – 11 August 2015, Penang
Dr Lim Kim-Hwa, Chief Executive Officer and Head of Economics
Mr Tim Niklas Schoepp, Senior Executive Officer
Dr Lim Chee Han, Senior Analyst
Miss Ong Wooi Leng, Senior Analyst
The Malaysian Ringgit dropped to its lowest level since 1998 at 3.9265 against the US Dollar on 10 August 2015.
Bank Negara foreign currency reserves slide to US$ 96.7 as of 31 July 2015, the first time below US$ 100 billion since 2010.
China weakens yuan reference rate by record 1.9% to enhance export competitiveness, thereby weakening Ringgit indirectly further.
The combination of external and internal factors has resulted in the slide of the Malaysian Ringgit. This affects Malaysian households and businesses differently. Whilst the implications can be complicated to Malaysian households and businesses, we note some clear direct effects here.
The depreciation of the Malaysian Ringgit engenders winners and losers:
Winners – benefitting from Ringgit’s fall
- These are companies with substantial US$ export revenue but costs are in MYR.
- Since intermediate costs remain in US$ (such as shipping and handling costs, transportation and warehousing costs, insurance costs incurred on goods in transit, and other costs incurred form the producer or supplier to the user or customer), the benefit is reduced.
- Tourism sector
- Malaysia becomes a cheaper tourist destination for overseas travelers. This will benefit Malaysia’s top holiday destinations such as Kuala Lumpur, Penang and Melaka.
- Domestic holiday destinations get more attractive, as travelling overseas becomes more expensive due to unfavorable exchange rates for Malaysian travelers.
- Therefore, it is likely that the tourism sector will benefit from Ringgit’s fall. However if imported produce is required to support overseas tourists (e.g. imported food), some benefit will be reduced.
- Crude oil prices have fallen close to the year’s low. As oil and gas is traded in US$ and Petronas reports its accounts in Ringgit, the negative impact from the fall in crude oil price is cushioned by a falling Ringgit.
Losers – suffering from Ringgit’s fall
- Imported goods will be more expensive. This is also due to the recent introduction of GST.
- Due to the MYR depreciation, the GST effect and the reduction in fuel subsidy, upward inflationary pressure is likely to be more pronounced in the months ahead.
- Private savings are negatively affected by the Ringgit depreciation, when measured in foreign currencies.
- Local businesses / Importers
- Goods imported in foreign currencies but sold in the local market will become less profitable.
- Companies selling to local consumers will be pressured as domestic consumption demand cools when consumers become cautious.
- Companies and households with unhedged foreign currency debt will find debt servicing costlier.
Borrowers with unhedged foreign debt
- Malaysian households
- Malaysian households will suffer a loss of purchasing power. This will reduce their standard of living compared to residents in other countries.
- Parents with children studying abroad (e.g. in Singapore or UK/USA) will find it costlier.
- Health care is likely to become more expensive as medical goods are generally imported from overseas and priced in US$.
- Airline input costs (e.g. jet fuel, parts) are generally in foreign currencies, whereas the revenue is generated in MYR.
- Nevertheless the fall in jet fuel price due to the fall in crude oil will mitigate some profit compression.
In the short term, we expect the Malaysian Ringgit to remain weak because:
- The US interest rate is likely to rise in September 2015 and will put further pressure on the MYR.
- Foreign ownership of Malaysian Government Securities is high and close to 40% (RM 167 billion as of 30 June 2015). As foreign capital depart due to higher US interest rates, Ringgit will be sold.
- Investors’ confidence remain low after the cabinet reshuffle in Malaysia and the issues around state investment fund 1MDB.
- Higher likelihood of a competitive devaluation across the region due to China devaluing its yuan.
- Low commodity prices, especially crude oil, LNG and crude palm oil, reducing Malaysia’s balance of trade. Near term dynamics for these commodities such as US shale oil, Japan restarting its nuclear reactors and a good oil palm harvest will mean that prices of these commodities are likely to remain low.
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