Less value for ringgit

MALAYSIANS are now getting less bang for their buck, compared to early this year, as the value of their ringgit has depreciated against most major currencies in the world.

Against the widely perceived safe-haven currencies, US dollar and yen, for instance, the value of ringgit has fallen by about 2.3% and 8.4% year-to-date, respectively. Against other major currencies, the value of ringgit year-to-date has depreciated by around 3.4% against the British pounds; 6.7% against euro; 3.1% against the Singapore dollar; 2.6% against the Australian dollar; and 6.1% against the renminbi or yuan.

But maybe the depressed ringgit could spell some good news to local exporters, as the value of their goods and services will now become more attractive and relatively cheaper to foreign buyers. This could help cushion companies' overseas sales, which is a saving grace, especially at a time when international trade is expected to enter a slow and sluggish pace (if not falling off the cliff) because of the ongoing global economic uncertainties.

And perhaps, Malaysia will be able to draw more foreign tourists, as the weakness of ringgit has likely made the country a more affordable holiday destination to many. This presents a contrast to Malaysians with plans to travel to certain countries overseas, as the volatility of the ringgit, which will likely continue over the medium term, will likely give them less value for their money.

Amid the sovereign debt problems continuing to brew in the 17-nation eurozone and growing fears of a double-dip recession in the United States, economists believe the weakness of the ringgit against major currencies, especially the US dollar or greenback, will likely persist for at least the next few months.

It was just three to four months ago when the ringgit was seen strengthening, touching a record high of 2.939 against the US dollar on July 27, while its performance against other currencies were mixed. It has since lost about 6.8% to be trading at around 3.139 per US dollar on Thursday.

The weakening trend of the ringgit first became noticeable early last month, as the reversal of short-term foreign capital flows, driven by fear, accelerated between August and September. The unwinding of foreign investors' position in Malaysia was well reflected in the plunge of local equity prices during that period.

To put that into perspective, recent data released by Bank Negara showed that foreign investors were net sellers of Malaysian equities in August and September, having liquidated about US$290.6mil and US$149mil, respectively, of their holdings in the country. And as a reflection of the huge capital outflows from the country, the central bank's foreign exchange reserves fell sharply by US$5.3bil to US$131bil as at the end of September.

CIMB Investment Bank Bhd chief economist Lee Heng Guei explains to StarBizWeek that the volatile capital flows will remain the source of wild swings in the ringgit movement over the medium term.

But such predicament is not common only to Malaysia.

Asian currencies, save for the Chinese yuan and Hong Kong dollar, have all weakened against the US dollar quite significantly since the beginning of August due to capital outflows.

Greenback still reigns

For instance, the Indian rupee has fallen by more than 10% against the greenback in less than two months, while the South Korean won has fallen by about 9%, Singapore dollar by almost 6%, Taiwanese dollar by about 4.8%, Indonesian Rupiah by about 4.6% and Thai Baht by about 3.6%.

(Hong Kong dollar is pegged to the US dollar, while the Chinese yuan is traded in a managed-float system and face increasing US political pressure to appreciate at a faster pace. The value of the Chinese yuan has gained only by about 0.8% against the US dollar over the last two months and 3.5% since the beginning of the year. It is still deemed significantly undervalued against the greenback at current levels.)

The resurgence of the US dollar, economists say, is attributable to growing concern of investors over the increasingly gloomy global economic outlook for the medium term. The market has noted that investors have been scaling back their foreign holdings to put more money in US dollar-denominated assets, such as the US Treasury bonds, which have traditionally been regarded as safe haven, to protect their assets amid the global economic storm.

“In foreign exchange terms, there is simply nowhere else to hide; investors have bought the US dollar by default,” HSBC Global Research's foreign exchange strategists explain in their newly published report.

Analysts at the international financial services provider reckon investors' retreat to the US dollar is not motivated by any particularly strong positive sentiment towards the greenback per se. In fact, they note that investors are well aware of the persistent structural problems in the world's largest economy.

“The fundamental rationale to be bullish on Asian currencies remains, but position reduction and the preference for US dollar liquidity in times of heightened stress overrides the underlying positive fundamental story,” HSBC Global Research's analysts say, adding that they believe Asian currencies could face stronger headwinds ahead.

Such likelihood is accentuated by the dismal outlook issued by the International Monetary Fund (IMF) over the week, citing increasing risks “decidedly tilted to the downside” for Asia because of the ongoing debt woes in Europe and a slowdown in the US economy. Reuters quoted the intergovernmental organisation warning about a risk of capital outflows from the region, as foreign investors from advanced economies could reverse the large positions they had built in Asian markets since 2009.

According to economists, the scope for real strengthening of Asian currencies is also limited by possible expansionary monetary policy measures, which regional central banks would likely implement to help sustain their domestic economic growth amid slowing external demand. Such measures could include cutting of interest rates, such as Bank of Indonesia's slashing of the country's benchmark interest rate by 25 basis points to 6.5% over the week. Reducing interest rates could narrow the interest-rate differential between the United States and emerging Asian economies, hence making it less appealing than before for investors to park money here.

In addition, some Asian policymakers would likely prefer to have a not-so-strong currency in order to sustain their export competitiveness and support economic growth. Singapore's policymakers, for instance, have signalled their preparation to intervene in the currency market to slow the appreciation of their dollar to help the country's main engine of growth, exports.

It's interesting to watch how the global economic situation will pan out in the next few months. While investors wait for the dust to settle, fear and uncertainties will remain the name of the game, and for Asia, it will mean vulnerability to downside volatility.

By CECILIA KOK, cecilia_kok@thestar.com.my