By Khairie Hisyam
A weakened ringgit proved a surprise boon for trade performance in June but that boost may be limited in the larger picture, says an economist. KINIBIZ reviews the myriad factors affecting Malaysia’s trade performance outlook in the second half of 2015.
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With the faltering ringgit providing support for Malaysia’s trade performance, how long will the current weakness of the currency last? It’s hard to say, according to several economists KINIBIZ spoke to.
“I think the ringgit weakness should continue to the end of the year,” said BIMB Securities economist Imran Nurginias Ibrahim to KINIBIZ, adding however that owing to the multitude of factors affecting the ringgit, “it is hard to say”.
A multitude of factors impact the ringgit exchange rate. Among others a potential interest rate increase by the US Federal Reserve may also be a dampening factor on the ringgit, noted TA Securities analyst Shazma Juliana Abu Bakar, who tracks economic data.
Most recently, the China central bank slashed its daily reference rate by 1.9% for the yuan on Aug 11, a surprise move that may signal the start of policy easing. The move represents the sharpest devaluation of the currency since the mid-1990s, in turn depressing China’s currency to a three-year low.
In response, the ringgit fell further on Aug 12 to breach the 4.00 mark to the US dollar, although other currencies in the region also slumped in knee-jerk reaction.
Faltering ringgit double-edged
While a further weakened ringgit may seem good news for exports, it is a double-edged blade for trade overall. On one side, Malaysian exports become cheaper and thus more competitive to the global market, yet on the other side, imports into the country also become more expensive.
This effect was visible from June trade data released by the Department of Statistics on Aug 5. While imports of consumption goods rose spectacularly, imports of capital goods and intermediate goods – essentially raw materials, semi-finished products and the like for further processing – saw declining numbers.
“This would impact costs of inputs into production, so it depends on how manufacturers factor this in,” said Imran to KINIBIZ.
Furthermore imports have not shown signs of turning around into growth territory despite the weakening of the ringgit apparently slowing down its expected contraction, said another economist who declined to be named.
Back to exports, despite conventional wisdom that a weakened currency bodes well for exports, the benefit to Malaysian exports may be limited, said Shazma Juliana of TA Securities.
“It will help, but not much… the demand is not there,” said Shazma Juliana to KINIBIZ, clarifying that Malaysia’s major trading partners are also seeing economic slowdown, which implies further weakening of demand for Malaysian exports.
‘Current account deficit unlikely’
With shaky outlook for overall trade performance in the second half of 2015, economists expect Malaysia’s trade surplus to narrow by year-end while remaining in positive territory.
This would in turn drag down the national current account figure and the balance of payments as well.
“If you look at the current account, basically other components have been negative over the past few years, so the only main contributor to the current account is trade,” said Imran to KINIBIZ. “I don’t see any (forthcoming) improvements from other components to the current account.”
The current account is the sum position of the trade in goods and services. It shows whether a country is a net exporter or net importer of goods and services apart from financial transfers and investments.
The balance of payment is the net position of the current account and capital inflows and outflows. While the current account has been in surplus, the capital account has been in deep deficit in recent months, leading to a net outflow of funds.
The implication is that as the trade surplus narrows down, this would in turn cause the overall current account figure to also shrink. However the current account is unlikely to turn into a deficit, said Imran.
Looking at the larger picture, Malaysia’s balance of payments may suffer from a narrowing of the current account surplus while the capital account is going deeper into deficit.
“I think the capital account will be on negative mode because of the challenging economic environment, so we are going to see some negative numbers, quite ugly on the investment side,” said Shazma Juliana, noting that capital outflows for the year-to-date to July comes to RM11 billion, “way above” the RM6.9 billion in outflows seen in the previous corresponding period in 2014.
This means a narrowing of the current account surplus will add to a weakening of Malaysia’s balance of payments, she added.
Watching trading partners
With a rough ride likely for Malaysian trade performance for the rest of 2015, there are a number of potential catalysts to watch both overseas and domestically. One would be how things unfold in Malaysia’s major export markets, said Imran of BIMB Securities.
According to a report by Standard Chartered on Aug 12, the devaluation of the Chinese currency on Aug 11 hinges on two purposes: the first is to boost the yuan’s case for inclusion into the IMF’s basket of currencies forming its Special Drawing Rights (SDR), essentially supplementary foreign exchange reserve assets.
It is also seen as an attempt to stimulate demand for its exports as the nation’s economic growth slows in recent months. If this effect is achieved then the indirect impact may be increased demand for Malaysian exports, China’s largest trading partner in Asean. The same holds true for Malaysia’s other major trading partners.
“Moving forward, if economies like the United States, Japan and Europe improve, it will help our exports as well because these are among our major shipments,” said Imran to KINIBIZ. “In the second half I expect to see further good news from these three markets.”
Europe had apparently overcome the hurdle that was the Greece debt crisis and can now focus on its economic growth as a bloc, noted Imran, while Japan’s economy should hold steady with a slight growth potential due to the delay in implementation of its sales tax.
Close to home, however, the economic outlook and performance of Malaysia’s immediate neighbours would also have a direct impact on trade performance going forward. “We also export quite a lot of our products to our neighbouring Asean countries – if their economies slow down, demand might slow down,” said Imran further.
In domestic terms, however, the upcoming Budget 2016 announcement in October may prove interesting in terms of future trade performance, said Shazma Juliana of TA Securities.
Fundamentally the Malaysian economy is on solid ground but poor sentiment and uncertainty remain what is really pulling down the market, said Shazma Juliana further.
“Currently I don’t see many positive catalysts for our economy,” she said to KINIBIZ. “We need more positive catalysts apart from the positive impact of weakening ringgit on trade.”
Yesterday: Faltering ringgit gives Malaysian trade a breather
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