Whither the ringgit? US Inflation & workforce are the bigger problems

 

WITH the ringgit passing the RM4.50 mark to the mighty US dollar, questions have been asked as to where the ringgit is headed, as it has dropped almost 9% year-todate and at a level last seen during the Asian Financial Crisis in 1998 – almost a quarter of a century ago.

“See you at five” – a term coined during the crisis time, is being re-played like a broken record as speculation mounts that the ringgit will hit the unthinkable five handle to the dollar in future.

However, as we are aware, the ringgit is not to be entirely blamed for its weakness, as there are other factors that are playing out.

If one were to analyse carefully, the ringgit is in actual fact firmer against the Japanese yen by about 12.5%, up 7.2% and 7.1% against the British pound and the South Korean won respectively; between 0.9% and 3.8% higher against the Chinese yuan, Thai baht, Philippine peso and the euro. 

 

Other than the US dollar, the ringgit is only weaker against the Australian dollar, Indonesian rupiah, and the regional champion, the Singapore dollar by between 1.1% and 4.5%. 

 

Hence, overall, for the performance year-to-date, the ringgit may look like a weak currency as we are fixated on comparing the ringgit’s performance against the US dollar as well as the Singapore dollar, but in actual fact, the ringgit has outperformed at least seven other major and regional currencies.

The strength of the US dollar cannot be denied as the Federal Reserve (Fed) is battling hard against high inflation prints and is left with no choice but to raise the benchmark Fed fund rate (FFR).

Having raised 225 basis points or bps so far this year, the Fed is now poised to increase the FFR by another 75 bps in the September Federal Open Market Committee (FOMC) meeting next week, with odds of 100 bps too not being ruled out at all.

This was after the headline and core US inflation prints came in at 8.3% and 6.3%, and ahead of the market forecast of 8.1% and 6% respectively. Should the FOMC raise the FFR by 75 bps next week, the market is pricing in another 75-bps hike in the November meeting and a 50-bps increase in the December meeting.

This will take the FFR to 4.25%4.50% and bring the 2022 rate hikes to 425 bps. With the US 10-year treasuries at 3.43%, the yield spread between the Malaysian benchmark 10-year Malaysian Government Securities has narrowed to just 72 bps from 209 bps at the start of the year.

Indeed, the divergence in the monetary policy adopted by the Fed has a significant impact on the ringgit too.

Another key factor that the ringgit seems to be suffering is the correlation between the ringgit and the yuan. Both currencies removed the dollar-peg in July 2005, with Kuala Lumpur following suit right after Beijing’s move. Since then, the ringgit seems to have a high correlation with the yuan. 

Year-to-date, although the ringgit is up 0.9% against the yuan since the start of the year, the ringgit’s movement against yuan has been relatively flat over the past five years with the local currency down by 0.4% compared with a year ago, and 1.2% over the past five years.

The yuan has also been weaker against the US dollar, as the Chinese economy has not been doing well since China’s zero tolerance towards Covid-19 cases, which has resulted in major cities or regions going into short-term lockdowns. The yuan even hit a fresh two-year low, flirting with the seven handle against the US dollar.

Other factors too are playing out on the ringgit weakness, although we are fortunate that we continue to run a current account surplus, we have been running budget deficits for nearly a quarter of a century.

This has ballooned our federal government debt level to the extent that we have even moved the needle to ensure we remain within the redefined debt/gdp ratio.

Malaysia also has an over-dependence on foreign workers, which continues to weaken the ringgit with a high level of foreign remittances as well as a deficit in our services account and net outflows from primary income.

In addition, Malaysians investing abroad is another strain on the ringgit, while errors and omissions too can be a large contributor to the ringgit’s weakness as well.

As measuring a currency is all relative, it is understandable when the general public refers to the ringgit’s strength or weakness as “only” when compared with the US dollar and to a certain extent, the Singapore dollar.

Chart 1 shows the relative performance of the ringgit against the major global and regional currencies.

It can be seen that much of the weakness against the US dollar and the Singapore dollar occurred this year itself, while against the pound, euro, yen, won, baht and peso, the ringgit has been gaining ground not only year-to-date but also over the past year and five years.

Against the Australian dollar and rupiah, the ringgit has recouped its weakness against the two currencies with a stronger performance year-to-date.

While the picture looks respectable over the past five years, data going back over a 10-year and 15-year period, suggests that the ringgit has significantly underperformed.

Chart 2 shows the performance of the ringgit vis-à-vis the major global and regional currencies.

As seen in Chart 2, over a 10-year horizon, ie, from mid-september 2012 to the present, the ringgit is only firmer when compared with the yen (19.1%); Australian dollar (5.1%) and the rupiah (5%).

Against all the other currencies, the ringgit is weaker by between 6% against the pound to as much as 49.1% against the US dollar.

Over a 15-year horizon, the ringgit was also seen as weaker as it was down by between 4.5% against the yen and Australian dollar to as much as 40% against the Singapore dollar.

The ringgit is only firmer against the pound (25.6%); rupiah (18.1%); won (13.3%) and the euro (6.2%).

Another comparison is the performance of the ringgit since it was de-pegged on July 21, 2005.

Here one can observe that while the ringgit is down 41.3% since then against the yuan and 19.3% against the US dollar, it is firmer against other major currencies, rising by 1.9% against the euro, 6.4% against the yen and 21.3% against the pound.

Regionally, although the ringgit is up more than 20% against the rupiah, the ringgit is down significantly against other regional currencies.

This is sharpest against the Singapore dollar with about 42.7% depreciation, 35.7% against the baht, and 16.5% against the peso.

As currencies are valued on a relative basis by comparing one currency with another, an alternative approach is to look into the real effective exchange rate (REER) which takes into account the weighted average of a currency in relation to an index or a basket of other major currencies. The weights are based on comparing the relative trade balance of a currency against each country in the index.

REER data is provided by the Bank of International Settlement (BIS) monthly and Chart 3 summarises Malaysia’s REER performance since the de-pegging days, plotted against the US dollar.

The chart shows a highly correlated chart whereby the correlation was observed at -0.95, suggesting that REER has a significant impact on the value of the US dollar-ringgit exchange rate.

A tough question as the valuation of a currency is always seen as a relative point to another currency while the strength/weakness of one currency can also be attributed to the relative weakness/strength of another currency.

Nevertheless, if one were to gauge the REER as a reference point, the ringgit is effectively undervalued by approximately 16.8%, as a neutral REER should be at the 100.00 index point level.in

At this level, the ringgit’s fair value is approximately RM3.89 to the US dollar. However, the REER has always been trading below the 100 index point level, except for a brief occasion between April 2010 and August 2011; in February/march 2012; and between November 2012 and May 2013.

In July 2011, the ringgit traded at its post de-pegging high of RM2.9385 before succumbing to weakness due to multiple reasons.

Bank Negara’s international reserves begin to weaken from a peak of Us$141.4bil (or Rm435.5bil) as at May 2013 at a time when the ringgit was trading at RM3.08 to the dollar and the REER was at its peak of 104.11 points.

However, if one were to take the average REER of 93.34 points over the past 17 years, the ringgit has a fair value of RM4.17 to the dollar.

Hence, while the ringgit has weakened considerably against major currencies, especially since its de-pegging days, the local currency remains an undervalued currency by between 8.9% and 16.6%.

While the ringgit is seen as weak against the US dollar and Singapore dollar, it has outperformed against other major currencies like the euro, pound and yen.

Over the longer term, Malaysia needs to address the serious structural issues that have made us less competitive than our neighbours. Top of the list is education reforms which should be addressed quickly as we are losing out our young bright minds via migration.

One of Malaysia’s biggest losses is the brain drain that has benefitted many countries, especially Singapore, Australia and even as far as the United States.

The second issue that Malaysia needs to address is to attract right-minded high-skilled knowledge workers as well as the ability to attract the right investment dollars into Malaysia.

The spill-over effect from an investment-friendly country is multiple, as it can help to lift Malaysia’s competitiveness not only in traditional fields but new robust industries related to the technology and services industry.

Third, Malaysia needs to address the current low wage levels of Malaysians as we cannot be a high-income nation if 50% of Malaysians are earning less than RM2,100 per month.

There must be a concerted effort to increase wages, which will indirectly address not only the rising cost of living but increase the affordability as well as tax revenues of the government.

Fourth is our fight against corruption. It is a known fact that a low ranking in Transparency International’s Corruption Perception Index is highly correlated to the cost of doing business.

Malaysia needs to make greater efforts to weed out the corrupt practices, both in the government and in the private sector to enable Malaysia to be better position to not only attract the right global investors but to reduce the cost of public spending, which eventually leads to a lower cost to consumers.

Finally, it’s the politics and public policies that come with it. We must not only be investor friendly but must avoid flip-flopping policies that can cause serious irreparable damage to our reputation in the eyes of the world.

Public policies too must be cleverly crafted with the right inputs from all stakeholders to enable Malaysia to march forward as one.

Only then, we will see a stronger ringgit not only against the currencies that Malaysia has outperformed but also against the mighty US dollar and Singapore dollar

  by StarBizPANKAJ 4. KUMAR Source link

 

 Top stories

The Star 

US Inflation? The workforce is the bigger problem

 https://www.thestar.com.my/business/business-news/2022/09/17/inflation-the-workforce-is-the-bigger-problem

---

Advisor Perspectives

US Inflation? The Workforce Is the Bigger Problem - Articles

 https://www.advisorperspectives.com/articles/2022/09/14/inflation-the-workforce-is-the-bigger-problem

 

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Yuan’s rising global influence

The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.

` BEIJING: The Chinese yuan is having a greater impact on its emerging-market counterparts than ever before and may play a crucial role in determining their performance in the coming year.

` The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.

` While the close relationship is partly a result of China’s large weighting, it’s also been driven by the yuan’s links to the Brazilian real reaching the strongest since at least 2008, and that with India’s rupee touching a three-year high.The yuan’s rising global influence is yet another sign of China’s deepening connections across the world economy.

` Investors are increasingly being drawn to its bonds as an alternative to United States Treasuries, while some banks are calling for the yuan to join the dollar, euro and yen as a global reserve currency.

` ADVERTISING Yet with China’s potential being offset by murky policy making and regulatory crackdowns, being tied too closely to the yuan may also backfire.

` “China is going to be a very important element of emerging-market stability and the growth picture,” said Magdalena Polan, principal economist at PGIM Ltd in London.

` “The willingness for Chinese policy makers to stabilise growth will be very important to the outlook for Latam and Asia and South Africa, as countries there still rely quite a lot on exports from China.”

` While correlations can be measured in many ways, China’s increasing presence in global trade has progressively boosted the yuan’s links with those of its emerging-market peers.

` In 2000, the average developing nation sent only 2.2% of its exports to China, while that proportion has now grown to 11.3%, according to data from Societe Generale SA.

` The investment bank says the yuan’s relative stability has traditionally made it most closely correlated with those of its emerging-market peers with strong and credible policy makers such as Mexico, Chile and South Korea.

` Since the US-China trade war in 2018, however, the yuan’s links with emerging markets as a whole have grown stronger, with the average correlation rising to 83% that year, according to SocGen data.

` There’s a risk of course that those very connections may also weigh on emerging-market currencies if the yuan begins to weaken. The major risk of that happening looks to be due to potential policy divergence, with the People’s Bank of China expected to ease monetary policy in 2022, just as central banks from the US, UK and Australia start to tighten.

` The yuan will face a particular challenge as the Federal Reserve beings to raise borrowing costs, a move that is anticipated to lead to a stronger dollar and outflows from emergin

`g markets. Still, China’s currency has so far shown itself to be relatively resilient to monetary policy at home and abroad. China’s economy has become an increasingly important influence on global growth over the past decade, and a vital one for emerging markets, according to JP Morgan Private Bank.

` “Since the financial crisis, we’ve had mini cycles in global emerging markets, largely coincident in China’s property and credit cycle and since the crisis that has been the key driver of the outlook in emerging markets for the most part,” said Alexander Wolf, head of investment strategy, Asia, at JP Morgan Private Bank in Hong Kong.

` The yuan’s relative resilience this year has also played a role in limiting fluctuations across emerging markets, in what has otherwise been a very tumultuous 12 months.

` “The fact that the yuan’s not doing too much I categorise it as a volatility suppressant,” said Paul Mackel, head of global foreign-exchange research at HSBC Holdings Plc in Hong Kong. “We believe that stability can last for longer.” — Bloomberg 

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Property prices will hold as ringgit falls to new low against USD and S$

PETALING JAYA: The depreciation of the ringgit will not lead to real estate prices crashing.

The Malaysian Institute of Estate Agents (MIEA) president Eric Kho said property remained a sound investment despite the current economic climate.

“Holding property is always better than holding cash,” he said.

Kho acknowledged that demand for primary or new developments had slowed but not as a result of weakening currency.

He said the slowdown was due to Bank Negara guidelines for banks to be more prudent when providing loans as well as increased construction cost due to the Goods and Service Tax (GST).

Kho said construction cost had increased by up to 15% and some developers were holding back on launching new properties.

He said developers who had launched projects were offering huge discounts to attract buyers.

Kho said there was also a slowdown in the secondary market and those looking to buy could expect to pay between 5 and 10% less, depending on location.

Kho, however, expected this situation to be temporary and said property would eventually appreciate.
- The Star/Asia News Network

Ringgit falls to a new low

PETALING JAYA: China’s central bank adjusted the yuan downwards for the second consecutive day, sending markets and currencies reeling.

The ringgit continued its fall against the US dollar, hitting a new low of RM4.0275, largely due to the devaluation of the yuan.

All currencies in the region also continued with their decline against the US dollar.

On a year-to-date basis, the ringgit is the worst performer among its Asian peers, and is down 13.33%. This is followed by the Indonesian rupiah, South Korean won and Thai baht at 9.88%, 8.35% and 6.99%, respectively.

Comparatively, the yuan is now down approximately 4.61%.

The impact on the ringgit is worse compared to other countries because Malaysia is viewed as a net exporter of energy and prices are depressed now – hovering below the US$50 per barrel mark.

Stock markets across the region fell with the Jakarta Composite Index leading the pack by falling 3.1% followed by Hong Kong’s Hang Seng Index which dropped 2.38%.

There was a “bloodbath” on Bursa Malaysia where about 90% of the 1,000-odd stocks listed closed lower.

The benchmark KLCI fell for the fifth consecutive day, shedding 26.8 points yesterday to close at 1609 points. Since last Thursday, the index has been down by 116 points.

On Tuesday, the People Bank of China (PBOC) moved the guiding rate for the yuan 2% downwards and yesterday it set it at 1.6% lower. The guiding rate is the band within which the yuan is allowed to trade.

The downward movement is viewed as a devaluation of the yuan and the biggest currency movement for the world’s second largest economy since 1994. Although China abandoned its currency peg in 2005, the central bank manages the yuan in a tight range.

The devaluation of the yuan has sparked concerns that China’s economic slowdown was more severe than anticipated and the central bank had to devalue the currency to export its way out of the situation.

Independent economist Lee Heng Guie said that the devaluation that has sparked a global currency war may end up with no winners.

The impact on depreciating ringgit is likely to be felt most by companies which import their raw materials, consumers and parents with children studying overseas.

BY RAHIMY RAHIM, RAZAK AHMAD, AND L. SUGANYA The Star/Asia News Network

Ringgit hits new record low of 2.9109 to Singdollar

Malaysia's ringgit hit a new record low against the Singapore dollar on Friday (Aug 14).PHOTO: AFP

SINGAPORE - Malaysia's ringgit hit a new record low against the Singapore dollar on Friday (Aug 14), after the Malaysian unit slumped to a fresh 17-year low versus the US dollar.

With the fall in oil prices increasing concerns over the country's exports, the ringgit lost as much as 2.6 per cent to 4.1180 per dollar, its weakest since Sept. 1 1998.

It recovered some ground to trade at 4.0660 to the US dollar at 2:04pm, bringing its loss this week to about 4.5 per cent.

Malaysia pegged the ringgit at 3.8000 in September 1998 and maintained it until 2005.

Against the Singapore dollar, the ringgit tumbled 1.55 per cent to 2.9109 as at 11:45am from its close of 2.8665 on Thursday. The ringgit pared its losses to trade at 2.8944 as at 2:04pm.

Better-than-expected economic data on Thursday failed to dispel the gloom with the benchmark stock index falling 1.5 per cent on Friday morning, heading for its lowest close since 2012. Fve-year government bond yield rose to 3.982 per cent, its highest since November 2008.

Oil prices fell with crude futures hitting six-and-a-half lows, exacerbating worries about Malaysia's exports. The country supplies liquefied natural gas and palm oil.

Malaysia has also had to draw heavily on its foreign exchange reserves to defend its currency amid a political scandal, a yuan devaluation and slumping oil prices. Bank Negara governor Zeti Akhtar Aziz said on Thursday the central bank will need to rebuild the reserves that have fallen below US$100 billion for the first time since 2010.

"Foreigners are still selling," said Ang Kok Heng, chief investment officer at Phillip Capital Management Bhd. in Kuala Lumpur, told Bloomberg News. "Unless the ringgit stops weakening, I don't know how long the selling will continue." - New Straits Time

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  Chinese yuan extends fall, long-term depreciation unlikely, weakening is not devaluation

  BEIJING, Aug. 12 (Xinhua) -- Chinese currency continued to fall on Wednesday after the central bank reformed the exchange rate formation...

Chinese yuan extends fall, long-term depreciation unlikely, weakening is not devaluation

BEIJING, Aug. 12 (Xinhua) -- Chinese currency continued to fall on Wednesday after the central bank reformed the exchange rate formation system to better reflect the market.

The central parity rate of renminbi, or yuan, weakened by 1,008 basis points, or 1.6 percent, to 6.3306 against the U.S. dollar, narrowing from Tuesday's 2 percent, according to the China Foreign Exchange Trading System.

The People's Bank of China (PBOC), the central bank, changed the exchange rate formation system so that it takes into consideration the closing rate of the inter-bank foreign exchange market on the previous day, supply and demand in the market and price movement of major currencies.

The International Monetary Fund (IMF) described the central bank's move as "a welcome step" that allows market forces to have a greater role in determining the exchange rate.

"Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said in an email on Wednesday.

The IMF said it believes the country can achieve an effective floating exchange rate system within two or three years.

However, the move still surprised the market and prompted the lowest valuation of the yuan since October 2012.

Ma Jun, chief economist at the PBOC's research bureau, attributed the lower rate to a long-standing gap between the central parity rate and the previous day's closing rate on the inter-bank market.

In a latest statement released on Wednesday, the PBOC said the rate changes are normal, as it shows a more market-based system and the decisive role that the supply-demand relationship plays in determining the exchange rate.

"This may lead to potentially significant fluctuations in the short run but after a short period of adaptation the intra-day exchange rate movements and resulting central parity fluctuations will converge to a reasonably stable zone," the PBOC said.

Ma also said the shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation.

A relatively robust economy, current account surplus and the internationalization of the yuan will help the currency remain stable, the PBOC said.

Official data showed the Chinese economy maintained 7 percent growth in the first half of 2015 against challenges at home and abroad, creating sound conditions for the yuan to hold steady.

Surplus in goods trade reached 305.2 billion U.S. dollars in the first 7 months, a fundamental prop for the exchange rate.

An internationalized yuan and open financial sector have boosted the demand for the currency in recent years, which serves as momentum for the rate's stabilization, the PBOC said.

In addition, the PBOC also cited China's abundant foreign exchange reserves, stable fiscal condition and healthy financial system. The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate.

The PBOC said it will strive to further improve market-based exchange rate formation, maintain normal fluctuations and keep the rate basically stable at an adaptive and equilibrium level.
- Xinhuanet

Yuan weakening is not devaluation: central bank economist

Photo taken on March 16, 2014, shows yuan (central) and other currencies in the picture. [Photo/IC]

BEIJING, Aug. 11 (Xinhua) -- Allowing the Chinese yuan to weaken sharply against the U.S. dollar does not signify the beginning of a downward trend, a central bank economist said on Tuesday .

The yuan central parity rate announced by the China Foreign Exchange Trading System (CFETS) stood at 6.2298 against the greenback on Tuesday compared to 6.1162 on Monday, down nearly 2 percent, the lowest level since April, 2013.

The shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation, said Ma Jun, chief economist at the research bureau of the People's Bank of China (PBOC).

The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate.

The PBOC said Tuesday's lower rate resolved accumulated differences between the central parity rate and the market rate, and was part of improvements to the central parity rate formation system to make it more market-based.

Ma said a long-standing gap between the central parity rate and the previous day's closing rate on the inter-bank market led to the lower rate on Tuesday.

He said China's economic fundamentals support a "basically stable" yuan exchange rate. A central parity rate closer to the market rate will provide a more stable environment for macro-economic development.

The economy has shown signs steadying and recovery, with infrastructure investment accelerating and property sales improving. Compared with some economies under strong pressure to depreciate their currencies, China is better-off, with a current account surplus, huge foreign exchange reserves, low inflation and sound fiscal conditions, he explained.

From Tuesday, daily central parity quotes reported to CFETS before the market opens will be based on the previous day's closing rate on the inter-bank market, supply and demand and price movements of other major currencies, according to the PBOC.

In July 2005, the central bank unpegged the yuan against the U.S. dollar, allowing it to fluctuate against a basket of currencies.

Making formation of the central parity rate more market-based touches on the core of reform, compared with previous steps that mainly concerned how much the yuan can fluctuate, said Guan Tao, former head of the international payments department at the State Administration of Foreign Exchange.

The yuan was at first allowed to vary by 0.3 percent from the central parity rate each trading day and the trading band gradually expanded to 2 percent in March last year. The market expects it to expand to 3 percent in the near future.

The latest reform actually increases China's flexibility and independence in foreign exchange control, as a rigid exchange rate system is open to speculative attacks, Guan told China Business News.

Two-way fluctuations will become normal for the yuan in future, he said.

- Xinhuanet

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