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Malaysia: Can exporters benefit from the weaker ringgit?
EVEN as the US dollar is projected to strengthen in the near term, thus leading to a weaker ringgit, will Malaysian exporters be able to take advantage of it?
Many doubt if under the Covid-19 limitations, exporters can fully benefit from a weaker ringgit but some mid-to-larger sized exporters may weather through.
In the automotive components industry, supply chain disruptions are causing a shortage of Malaysian-made parts to car plants around the world.
With high oil and palm oil prices, exporters may benefit more if they keep their US dollar proceeds but some of them are already selling US dollars as these commodity prices climb.
No doubt five states may be going into phase two of the National Recovery Plan where more sectors will be allowed to operate from 8am to 8pm.
But the major industrial states in the Klang Valley, Penang, Negri Sembilan and Johor are still in phase one; worse still, Selangor and Kuala Lumpur (KL) are under a two-week enhanced movement control order (EMCO) where only selected factories are allowed to operate, including those producing food and medical items.
In 2020, Selangor and KL had contributed 24.3% and 16.1%, respectively, to gross domestic product.
The Klang Valley is the centre of manufacturing; not only will the majority of factories be closed but the entire supply chain will be affected and gateway volume, reduced.
Already, the 60% cap on manufacturing capacity will slow down production; worse still, in some cases, their production is not designed to work in this way, said MMC Corp Bhd
group managing director Datuk Seri Che Khalib Mohamad Noh.
Other constraining factors include skyrocketing logistics costs and inflationary pressures abroad that may dampen demand as Asian imports into those countries become more expensive.
A total of 13 manufacturing and manufacturing-related services sectors are allowed to operate at a 60% capacity, which includes the electrical and electronic, oil and gas as well as personal protective equipment sectors.
Five sectors
Companies operating at a 10% capacity cover five sectors – automotive, iron and steel, cement, glass and ceramics – are allowed to keep their machinery in “warm idle” mode.
Overall, export growth is likely to be resilient, buoyed by higher global demand for major commodities and the low base effect seen last year.
But any benefit from a weakened ringgit on exports is likely to be offset by the disruptions caused by the lockdowns.
A marginal moderation on a month-on-month basis is likely, due to the continuous extension of the full MCO (FMCO), which is now, worsened by the EMCO, said Alliance Bank Malaysia Bhd chief economist Manokaran Mottain.
With the EMCO, the ringgit may weaken further but there are still restrictions on the operating capacity of Malaysian exporters which will cap their ability to fully take advantage of the weaker currency, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.
It may be more challenging to meet the demands of clients as the standard operating procedures under the FMCO and now, EMCO, have become stricter.
Exporters may even lose their clients as they are not able to meet their demands on time, said Bank Islam Malaysia Bhd chief economist Mohamad Afzanizam Abdul Rashid.
On a month-on-month basis, exports have declined from RM190bil in April to RM170bil in May.
Malaysia’s exports had jumped 47.3% in May against the same period last year.
The IHS Markit Malaysia Manufacturing Purchasing Managers’ Index (PMI), compiled from a survey of purchasing managers of about 400 manufacturers, fell to 39.9 in June from 51.3 in May.
A weaker ringgit also affects imports where costs of raw materials and components are rising, in tandem with higher commodity prices worldwide.
“A significant boost for exporters would be to allow those companies with export contracts to operate at 60% capacity, ’’ said Small and Medium Enterprises Association national secretary Yeoh Seng Hooi. (pic)
Many exporters in the non-essential list such as those in the plastic, paper products, wood-based, garments and apparel sectors are not allowed to operate under phase one.
These exporters, including those in industrial clusters and areas under the EMCO as well as states still in phase one, should be vaccinated as fast as possible under the Program Immunisasi Industri Covid-19 Kerjasama Awam-Swasta (Pikas) or the National Immunisation Programme (NIP).
US dollar rally
While many are expecting a strong US dollar in the near term of three to six months, this US dollar rally may sustain well into the first half of 2022, with the ringgit weakening to 4.30 against the dollar by the first quarter of 2022, said RHB Bank Bhd group chief economist and head of market research, Dr Sailesh K. Jha.
Catalysts for a strong US dollar include rising US interest rates, flight to safety during some bouts of market turbulence and the exceptional US growth.
Malaysia and China stand to benefit the most from currency depreciation, said Dr Sailesh, who is maintaining his forecast for a 5.4% growth for Malaysia, with good export growth especially from mid-to-large sized exporters, and decent recovery in the second half.
Dr Sailesh considers the June manufacturing PMI, which shows a big drop, to be based more on sentiment.
Exporters should be able to take advantage of the stronger US dollar in the weeks ahead but a large move is not expected, especially with high oil and palm oil prices.
When prices are high, exporters get more US dollars which they may keep or continue selling; if they keep selling, that will offset the expected higher US dollar environment, said Hong Leong Bank managing director, global markets, Hor Kwok Wai.
Malaysian exporters need more than currency competitiveness to thrive, having moved up from 27th to 25th position on the World Competitiveness Yearbook 2021.
Currently, factories under the EMCO in Selangor are ordered to shut, a marked change from earlier when the electronics sector was allowed to remain operational.
With a tighter set of restrictions under the EMCO, the earlier sanguine view of the economy is looking less tenable by the day, said OCBC Bank Malaysia Bhd economist Weillian Wiranto.
In the long term, Malaysia needs to gain traction with foreign direct investment and export growth, and not just depend on a weak ringgit for competitive strength, said former Inter-Pacific Securities head of research Pong Teng Siew.
As Malaysia hastens its vaccination rollout, the hard data on export numbers will be closely watched, especially following the pessimistic outlook among purchasing managers in June.
Source: https://www.thestar.com.my/business/business-news/2021/07/05/can-exporters-benefit-from-the-weaker-ringgit