Ringgit weakness is a boon for exporters, but rising commodity prices could negate the positives

KUALA LUMPUR (April 28): While exporters are usually touted as the big winners from a weak Malaysian ringgit, it’s not so clear cut this time around as companies also experience rising commodity prices, amid the recent unprecedented chain of events. .

Despite the recent rally in crude palm oil (CPO) futures and Brent crude oil prices to near record highs – which would generally be positive for a net exporter of commodities like Malaysia – the ringgit has cracked under pressure against the US dollar and the Singapore dollar.

The ringgit hit 4.32 against the greenback – its weakest level since May 2020 – last Friday (April 22) and depreciated to a record low of 3.1766 against the Singapore dollar on Tuesday (April 26) amid hawkish sentiment ahead of the US Federal Reserve. (Fed) Federal Open Market Committee (FOMC) meeting and economic slowdown in China.

As of this writing, the ringgit is trading at 4.3585 against the US dollar and 3.1621 against the Singapore dollar.

While a weak currency can be a boon for exporters and a bane for importers, market watchers said the current situation – exacerbated by unprecedented events such as the Covid-19 pandemic and the disruption of the global supply chain – will not be the same as the consequences of the previous ones. inflation cycles.

Danny Wong, managing director of Areca Capital Sdn Bhd, said exporters of products or services quoted in US dollars, such as glove makers, electrical and electronics (E&E) players, petrochemicals, commodities and furniture producers would benefit from higher revenues and better margins. as their products become more competitive with a “cheaper” ringgit.

Similarly, Hong Leong Investment Bank Research (HLIB) head of retail research Ng Jun Sheng also said investors should look to semiconductor companies, manufacturing service providers electronics (EMS), electrical and electronics (E&E) players, wooden furniture manufacturers and plastic packaging companies. .

However, he pointed out that the weakness of the ringgit could nullify the potential benefits for exporters, as commodity prices have also risen.

“[The weak ringgit] may not really benefit exporters because commodity prices that have become very expensive have driven up input costs. [The exporters] may not benefit as much compared to the previous inflation cycle around 2015/2016.

“Inflation is much more serious this time around. Even if the selling price is high, the input prices are even higher. On a net-to-net basis, the question would be whether selling prices would outweigh higher input costs,” Ng said.

Meanwhile, those who will not benefit from a weaker ringgit include companies in the automotive, consumer and construction sectors, he added.

Another analyst who declined to be named said companies in the construction, real estate and consumer sectors could see some margin squeeze due to rising input costs and disruption to the supply chain.

“Supply chain disruption is a different topic that affects their revenue recognition. However, just in forex, the impact is expected to be net positive, but we believe the ringgit will strengthen by the end of 2022, so any tabulation [for winners and losers] is premature given the current volatility of the ringgit,” the analyst said.

Meanwhile, Areca Capital’s Wong said investors should watch out for companies with US dollar-denominated borrowings, such as equipment-heavy companies, which would have to pay more to service their debt.

“However, cash-rich companies with overseas assets/cash would have better valuation gains, especially companies with overseas subsidiaries in the US and Singapore. Companies with investment portfolios exposed overseas, such as banks, will also have better returns when valued at market price,” Wong pointed out.

Still, Wong thinks the weaker ringgit and weakness in Malaysia’s equity and fixed-income markets could attract inflows of foreign funds.