RINGGIT DOWN FOR THE COUNT? Impact of weakening ringgit

The weakening of the ringgit or rather the rise of the US dollar against the rest of the world's currencies has brought mixed fortunes to the local economy.

While public sentiment pertaining to the weakening ringgit has been overly negative given that the currency is now trading close to levels when the ringgit was pegged to at RM3.80 to the dollar after the 1997 currency crisis, analysts say that currency fluctuations were part and parcel of operating in an open economy.

"It is a tradeoff that we have to accept.

"While fundamentals of the country are strong, there may be a need to effectively manage public sentiment too. But on balance, a weakening of one's currency can actually be a blessing in disguise in the longer run," says an analyst.

"In the globalised world where products can be easily made anywhere, a weakening currency makes products that are manufactured in the country seem cheaper. This can affect everything from potential investments into the country to finished products indirectly making the country more competitive," he adds.

Currency wars for example, are competitive devaluations of a country's currency and have been happening on the global stage undertaken by countries such as China and Japan time and time again to buoy one's local economy.

Back at home, analysts say that while sentiment certainly seems to be negative for the man on the street and certain companies that rely on imports for their operations that such an impact was evened out by gains that were accrued to exporters in the bigger picture.

Hong Leong Investment Bank Research in a report earlier in the week detailed sectors that stood to lose and gain from the weakening ringgit.

It named industries such as the automotive, airlines, power and telecommunications industry as losers from the weakening ringgit.

Losers and winners

Pertaining to this, Interpacific Research's head of research Pong Teng Siew tells StarBizWeek that companies that derive their sales dometically with imported intermediate materials would be the worst hit from the weakened ringgit.

"This is because they would have to pay for their costs in US Dollars and sell in the local currency. Even if they are hedged, once the safety hedge expires it will be back to reality once again," Pong says.

"If the ringgit does remain weak or weaken further, there is a chance that currency hedges would need to be renewed once they expire and this would then impact on company's profitability eventually," Pong adds.

Then there is also the case of bottomlines being hit despite still strong operating conditions because of forex currency losses on foreign debt. This was the case for AirAsia X Bhd which had recently reported its first quarter losses widening by a huge margin to RM125.9mil (S$45 million) from RM11.28mil a year ago due to increased cost of foreign borrowings from the weak ringgit.

The company suffered in its bottomline despite a strength that was seen it its topline numbers for the quarter that rose by 3.45 per cent to RM775.37mil from RM749.48mil in the same quarter a year earlier.

Tenaga Nasional Bhd (TNB) is another company that does not escape the fluctuations in the ringgit as well with its foreign currency borrowings.

As of Feb 28, TNB had debts totalling RM25.6bil, of which 11.3 per cent or RM2.9bil, were denominated in US Dollars.

TNB's saving grace is the Imbalance Cost Pass Through agreements that would allow it to pass the additional costs from the higher raw material prices that is denominated in the US Dollar to its end users.

Other than companies, local consumers will stand to lose out from the weakening ringgit due to decreased purchasing power.

Products that are imported will cost more for the man on the street while overseas expenditures will also rise.

While on the surface it may seem that all is doom and gloom for the man on the street, these circumstances acrue strong competitive advantages for companies that can gain from such an environment of a weak currency. Pong says that despite the negative conotations pertaining to the weaker ringgit being played on the public gallery presently, a weaker currency actually also presents opportunities for exporters.

"We like to group exporters as one bunch of companies but there are differentiating factors too. Companies that export with their input costs sourced and denominated locally will stand to gain the most. Glovemakers are positioned here," Pong says.

"Companies that export with imported intermediate materials may or may not gain from the weakening ringgit. They will have to depend on their pricing power or these effects would be netted out," he adds.

Meanwhile, exporters within the technology and semiconductor space are well positioned to gain but their sales will also depend on the economic growth of global economies as well.

A fund manager from Hong Kong says that he remains cautiously optimistic on the technology space and expects the smartphone subsegment to drive growth within the wider industry as more and more people are seeing the necessity to own two phones nowadays.

Ironically, consumer companies are also net beneficiaries from the weakening ringgit, despite seeing their input costs denominated in the US dollars.

"The decline in raw materials for some consumer companies have offsetted the weakened ringgit.

"Moreover consumer companies hedge their prices for six months to one year in advance. On a net-net basis, consumer companies will gain," CIMB Research's consumer analyst Eing Kar Mei says. - Asiaone