Right move for a flexible rate for ringgit

10 Clicks To Victory ContestIT was a long-anticipated step. The ringgit is de-pegged from today and the exchange rate will be managed against a basket of currencies.  

When China announced yesterday it will float the yuan, which immediately rose 2% against the US dollar, Bank Negara, having prepared for a similar step, acted swiftly for a simultaneous change.  

The ringgit will now operate as a managed float, similar to how it was managed before currency controls were introduced on Sept 1, 1998, as well as comparable with the managed system for Singapore dollar.  

A managed float means the currency will fluctuate with a basket of currencies, mainly that of its major trading partners, but that fluctuation will be managed by the central bank. The exact proportion and type of currencies in the basket are usually not revealed. 

Choong Khuat Hock, research director of fund management company Kumpulan Sentiasa Cemerlang Sdn Bhd, said he expects the ringgit to strengthen by 2%, in line with the yuan.  

“This is an opportunity for the government to let the ringgit strengthen. That will help reduce inflation, without the country losing its export competitiveness. 

“But if the ringgit is not allowed to strengthen, especially if the regional currencies go up tomorrow (Friday), a lot more hot money will come into the country and that will cause more inflation,” he added yesterday.  

At the time of writing, the Japanese yen rose in New York where the currency is also traded and the Euro similarly moved up against the dollar.  

Meanwhile, banks in Malaysia are preparing for trading in the ringgit today, and have told their staffers to get into their offices by 5am today.  

If the ringgit strengthens, it will obviously mean lower costs for companies that import raw materials or components. On the other side of the coin, the US dollar revenue of exporters will be reduced when translated back into ringgit.  

The sectors that will benefit from a stronger ringgit will include the food industry that imports products like milk, rice, sugar and flour. Companies that would gain include Nestle Bhd, Dutch Lady Milk Industries Bhd, PPB Group Bhd and Padiberas Nasional Bhd.  

Related to that, it would also help the beverage and beer sectors. These industries import coffee and ingredients like barley for the production of beer. Carlsberg Brewery Malaysia Bhd and Guinness Anchor Bhd will drink to that.  

It would also lower the costs in the tobacco industry in their imports of tobacco leaves and cigarette paper.  

A major industry that may also benefit from a stronger ringgit will be airlines. They would have to pay less ringgit for their jet fuel and AirAsia Bhd, which is making a huge fleet purchase, would incur a lower purchase cost. All that, however, may be offset by the amount of revenue they get in US dollars.  

The export sector would have to brace for a stronger ringgit. For the moment, however, they should be able to absorb a 2% appreciation in the currency, should that occur.  

The exporters have enjoyed seven years of a low exchange rate that has helped them enormously, and they've had that time to value add their products and expand profit margins. They should therefore not rely entirely on a low exchange rate for their ability to export.  

The oil palm industry will see a small drop in their export revenue, although they will continue to be hugely profitable.  

It will also be a drop in the ocean in terms of the effect on the oil and gas sector which is enjoying its biggest boom in decades.  

The electronics industry may have to adjust to a stronger currency but that would be cushioned as it comes at a time when it is entering a period of a global cyclical upturn.  

All industries, and consumers, would welcome some relief from inflationary pressure that has been rising.  

This, in fact, is also one of the reasons that China, a huge importer of commodities, is allowing the yuan to move up. Time will tell if China will allow the yuan to appreciate further.  

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