We cannot run away from the issue of weakening ringgit when we talk about investments in the current climate.
But hear us – it is a double edged sword.
First let’s talk about the good side of weakening ringgit.
No, it is not a TYPO. Despite Malaysia Tourism and Culture Minister DS Nazri Aziz said “Weaker ringgit good for tourism and exports” which resulted in him drawing much flak from the public.
The thing is, he’s right. From this angle alone.
Let us explain.
For a tourist, say from US, it costs less for him to buy the very same thing/service he wanted to buy in Malaysia, now that USD 1 = 3.75 MYR compared to when it was at 3.2 MYR less than 1 year ago. It means more spending power for foreigner coming to M’sia.
How does this relate: It makes tourism related business enjoying brisk business. Simple example – Medical tourism. With or without weakening ringgit, it is already a a booming sector. Think KPJ Group. Or even other private healthcare businesses.
Export oriented company
For a companies which manufacture goods for exports, a weakened ringgit means their offshore customers pay less to get the goods/services from them assuming other things remains the same. So if you a run mainly export-oriented business,you’ll never complain when your overseas customer has more purchasing power. Like Asia File Corp, where 90% of its products are exported.
However, it is also too simplistic to assume ALL export oriented business will perform well in current economic climate. That’s speculative to do so.
Other factors will come into play too – like company management team, and closer to our heart, impact of GST. The likely increased costs of business due to GST, if not managed prudently by a competent management team might have already offset any advantages gained by a weakened ringgit.
Note: this is not an invitation to buy or sell, only for perspective sharing purposes
Many of us complain now about our weakened ringgit although the most probable way we are affected is when we travel overseas for vacation.
But how often does this happen?
Once or twice a year maybe?
Now, if you are like my friend working at Intel Penang who recently got relocated to US for a project, he’s happy as a lark because he gets more ringgit after conversion of his USD allowance
The group of people who really are facing difficulty are the ones where their costs of business is directly or indirectly corresponds to imports from overseas.
A scenario told by one of the radio listener while I was driving this morning sum this up perfectly.
He said, he operates IT accessories distribution business. He buys his stocks from China supplier for 100,000 Yuan end of April 2015. He is expected to pay RM 57,000 equivalent at the exchange rate then.
The net payment period in his credit term is 60 days, which means he has to settle his invoice end of this month. Now, while ringgit weakened more, he is now expected to pay RM 60,000 equivalent at today’s exchange rate.
Assume his expected profit margin is 10%, so his gross sales will be 1.1 x 57k = 62,700.
But now, his margin has been cut down to: (2,700/57,000) = 4.7% only
Next question is – why don’t he pay his supplier then (in Apr) instead of now (June)?
In reality, business, especially the trading type, is about cashflow. Instead of paying early payment (although there is normally an early payment discount in the credit term), that money is better used to “roll”.
Another question is – can he pass the increased costs to consumer?
The answer is – it depends. For IT accessories biz, it is highly competitive, so “you cannot afford to raise prices too much else you’ll lose business to competitor”, according to him.
But the thing is, if a company cashflow is strong (aka cash cow), would it face this problem?
Highly unlikely. The company can make early payment for discounts and also to mitigate the risks of ringgit weakening which lower its profit margin.
In times of weakening ringgit, local businesses with strong cash reserve or cash flow is king. If you are an investor, this is the type of company you want to invest in.
When it comes to foreign exchange rate, the strength of a currency is relative (instead of absolute). What this means is that it could be due to internal or external factors.
For example, assume everything remains unchanged on the local front, a strengthening USD will make ringgit weak. Conversely, a strengthening ringgit will make USD weak although everything remains unchanged in US.
Although this time, this is not the case. Let me explain
1MDB and Fitch ratings (internal factor)
Put it simply, it is related to government debts and its ability to fulfill its debt obligations, in the eyes of investors. Do you know that around 47% (as of Jan 2015) of government-backed securities are owned by foreign investors? If they lose confidence of government ability to fulfill its debt obligations, investors will pull out and move the money elsewhere. This is just common sense you would do.
This “pulling out” means foreign investors (esp US) convert their invested ringgit back to their home currency. As a result, the supply of ringgit goes up – as it is less in demand. What happens when something is lesser in demand? Its value goes down. Hence – this is what we see as “cheaper ringgit”.
Hence, if you still recall in our 1st email, it is narrow minded for our Tourism Minister to say weak ringgit is a good thing. Because one of the main reason why it is weak is bad!
Note – End of this month, Fitch will review Malaysia’s rating again. We shall see.
Oil & gas (internal + external factor)
While it was revealed that M’sia is actually a net importer of crude oil; it was apparent too that 30% of the country’s revenue is from O&G sector
So when oil price drops, country revenues goes down in tandem.
Common sense also comes into play here because when a “company” profit is down, you would want to invest elsewhere if there are better options.
Fed expected to hike interest rate (external factor)
The US Federal Reserve would be expected to do so in Sept; yet to be confirmed though. We don’t want to speculate based on sentiment or rumor, but the reality is, no one lives in a vacuum. The analogy here is the same, investors are channeling back their invested MYR back into US. Lesser demand in MYR = lower “price” = weakened ringgit.
We don’t want to paint a rosy picture for you of what has happened or is already happening….but, we want to make you more informed of things. The next question is – should this deter us from investing now? The answer is No.