Winners of stronger ringgit

A stronger ringgit will be a relief to local firms whose input and raw material costs are predominantly US dollar-denominated

By MARK RAO / Pic By MUHD AMIN NAHARUL

The outlook for the once-battered ringgit continues to brighten after reaching a six-month high against the US dollar, which has weakened on monetary easing by central banks worldwide.

Despite the holiday-thinned trading week, the local note traded as strong as RM4.06 against the US dollar last Friday — the highest level since Aug 1 last year.

The Reserve Bank of Australia was the latest central bank to adopt a dovish stance on interest rates following a similar signal from the US Federal Reserve (Fed) and the European Central Bank.

Emerging-market (EM) currencies such as the ringgit have benefitted from the environment of monetary easing as higher interest rates translate into higher yields for investors in those respective markets.

The Malaysian currency could also make a break to the RM4 ceiling against the greenback though a re- escalation of US-China trade tensions and a slowdown in the Chinese and global economy are among the downside risks.

In the meantime, Malaysia’s financial and capital markets began the year on a high note and should provide support for the ringgit in 2019.

FXTM research analyst Lukman Otunuga said foreign funds injected some US$235.2 million (RM964.32 million) into Malaysia’s equity market in January 2019 alone.

“Meanwhile, over in the fixed-income market, Malaysia’s issuance of RM4 billion in five-year Islamic bonds saw a bid-to-cover ratio of nearly two times,” he told The Malaysian Reserve (TMR).

“This points to a healthy demand for Malaysian assets which may lend support to the ringgit.”

Oanda Corp senior market analyst Jeffrey Halley said the ringgit’s performance is unlikely to track moves in Malaysia’s financial markets as the country’s central bank closely manages the exchange rate.

“However, if the Fed has indeed blinked on longer-term tightening, this could see both stocks and bonds rally not just in Malaysia but in EMs as a whole,” he told TMR.

“Bonds’ extra caveat would be the state of the government’s finances, but the cancellation of the East Coast Rail Link seems to signal a willingness to positively manage the fiscal situation.”

As initial signs are positive for the local note, TMR outlines the likely beneficiaries of a stronger ringgit this year:

Net importers versus net exporters: Prospects of a stronger local currency would be a relief to Malaysian companies whose input and raw material costs are predominantly US dollar-denominated.

Food and beverage companies, namely Fraser & Neave Holdings Bhd (F&N) and Nestlé (M) Bhd, are highly exposed to the ringgit-US dollar exchange.

As a net importer, the appreciation of the ringgit and Thai baht against the dollar will be favourable for F&N’s Malaysian and Thai businesses.

Meanwhile, a weaker US dollar should boost Nestlé’s earnings, as 50% of its raw materials are purchased in US dollar.

Malaysian steel manufacturers are similarly exposed as the majority of their raw materials come from the US and thus dollar-denominated.

CSC Steel Holdings Bhd saw its net profit plunge 78.8% year-on-year to RM2.98 million for its third quarter last year due to the increase in raw material prices and transportation costs.

For these companies, it is typically a balancing act between managing raw material costs and capitalising on higher average selling prices for steel products.

Automotive and aviation companies are also set to benefit from the weaker US dollar as a bulk of their input and operational costs are in US dollar. This includes Bermaz Auto Bhd, UMW Holdings Bhd, AirAsia Bhd and AirAsia X Bhd.

In contrast, net exporters such as plantation firms, glove manufacturers and semiconductor companies are expected to see their earnings come under pressure, as the majority of their businesses comes from overseas.

However, companies from these sectors have hedging policies in place and should be able to mitigate any foreign-exchange losses to be incurred.

Companies with high foreign debt: A stronger ringgit in 2019 will ease Malaysian companies’ repayment of ongoing debt obligations, especially those with high foreign currency-denominated borrowings.

Approximately 67.1% or RM27.87 billion of conglomerate YTL Corp Bhd’s total RM41.54 billion in borrowings are non-ringgit denominated. Its largest exposure is to the British pound at RM11.73 billion.

Loss-making Bumi Armada Bhd is also in the middle of discussions with lenders to repay some US$500 million in debt owed by the company.

The offshore oil and gas service provider raked up RM1.04 billion in net losses over the first nine months of 2018 and a weaker US dollar will ease some of the pressures hitting the company.

Malaysia Airports Holdings Bhd, MISC Bhd, Sime Darby Plantation Bhd and Axiata Group Bhd are also among companies who raised debt in US dollar and other foreign currencies, thus among the front-liners to benefit from a stronger ringgit this year.