While Washington and Beijing have agreed to a trade truce pending ongoing talks, this is far from the definitive agreement markets were hoping for

By MARK RAO / Pic By MUHD AMIN NAHARUL

VOLATILITY in ringgit and oil prices are set to persist this year despite the temporary respite on the US-China trade front, thus raising costs for trade-dependent companies and impacting government budgeting.

The local note had a turbulent performance in the first half of 2019 — appreciating 1.7% beginning late January to reach a year-low of RM4.06 against the US dollar on March 21, before ending June at RM4.13.

Expectations of the aggressive rate hike path adopted by the US Federal Reserve (Fed) coming to an end this year due to slower growth provided relief to the ringgit and emerging- market currencies, but was soon nullified by the escalation in US-China trade tensions.

While markets are expecting the Fed to cut its key interest rate as early as this month, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid expects the ringgit’s exchange value to be driven by US-China trade newsflow.

“There could be some form of intervention by Bank Negara Malaysia along the way, but this is merely to smooth the currency volatility and not to dictate the level,” he told The Malaysian Reserve (TMR).

“In that sense, the market is actually the main factor for ringgit movement.”

While Washington and Beijing have agreed to a trade truce pending ongoing talks, this is far from the definitive agreement markets were hoping for.

Trade risks are thus alive and, coupled with an overall challenging external picture, are fuelling the volatility of the ringgit, which will raise costs for trade-dependent Malaysian corporations.

“For companies, they would hedge their currency position in order to protect their underlying transaction, but there will be costs involved. It’s like buying an insurance policy to manage the risk,” Mohd Afzanizam said.

On balance, a weaker ringgit is beneficial for exporters as their products become price-competitive, while realising higher gains when converting their income abroad back into ringgit.

The likely gainers include glove makers, semiconductor manufacturers and commodity players who are net exporters.

Malaysian importers — like food and beverage firms, as well as automotive and steel manufacturers whose raw materials are sourced predominantly from abroad — will incur higher costs on a falling ringgit.

Companies with high foreign-denominated debt will also lose out in this scenario.

Vanguard Markets Pte Ltd managing partner Stephen Innes said Malaysia’s trade dependency on China makes it more susceptible than its regional peers to trade tensions.

“As opposed to, say, Vietnam, Thailand or Indonesia, who are picking up China’s export slack from a protracted trade war, Malaysia is very much export-dependent with China, so this hurts Malaysia more when trade frictions flare,” he told TMR.

“However, trade war neutrality is playing second fiddle to the chase for yield that positions the ringgit quite favourably as it opens the door for a rate cut (by Malaysia’s central bank) which will spur growth, is suitable for equity markets and create more demand for Malaysian bonds.”

Crude oil prices have been tied to the same external picture and have recently been caught between push and pull factors on supportive supply dynamics against demand concerns.

The US and Chinese economies are a key measure for demand as both nations are the largest oil consumers today, collectively making up over 40% of total crude oil consumption in 2016. Fraught US-China ties are thus bad news for oil demand.

Since the start of the year, Brent oil rallied 38.6% to reach a year-high of US$74.57 (RM308.72) on April 24, but since dipped to close at US$64.23 per barrel last Friday.

The Malaysian government turned to oil to help reduce and ease its heavy debt burden and budgeted for an average Brent oil price of US$70 per barrel this year.

“The government is increasingly becoming reliant on petroleum revenue, which would contribute about 30.9% of total revenue in 2019 from 14.6% in 2016,” Mohd Afzanizam said.

“As such, volatility in energy prices will have a direct impact to government budgeting.”

Innes said Malaysia’s economy is well-diversified to manage lower oil prices, but expects oil to be supported by OPEC-led production cuts.

“The Malaysian economy is much more equipped through diversification to face a downturn in oil prices but, with OPEC compliance, I would expect a solid floor to be maintained at US$60 per barrel Brent,” he said.