Limited downside for ringgit?

Rising deposits: Customers leave a Maybank branch in Putrajaya. The amount of foreign currency deposits in local banks has grown by leaps and bounds since 2007 – Reuters

THE amount of foreign currency deposits held in local banks by individuals and companies has grown by leaps and bounds since 2007 -- an indication that the confidence in the local currency has been waning not now but from several years ago.

The clearest indicator is the foreign currency deposits held by individuals with banks in Malaysia. It has grown more than 18 times in the last eight years. In 2007, the total foreign currency deposits held by individuals in domestic banks in ringgit terms was RM820.3mil. As at end-July this year, it stood at RM14.430bil.

Malaysians have been increasingly converting some of their savings into foreign-denominated currencies since 2007. Astoundingly, the deposits have been rising for every single month in the last eight years -- even when the exchange rate was RM3 to US$1 in 2013.

Individuals have money in foreign currency deposits for their investments overseas such as property or for their children’s education.

But the fact is, even when the ringgit had gained strength against the US dollar between 2010 and March 2013, Malaysians have been keeping some money in foreign currencies as deposits.

The irony is that the foreign currency deposits hardly give any returns – at a mere 0.25% to 0.5% per annum against the ringgit account that gives above 3%. But money was still being converted from ringgit to foreign currencies.

The reason obviously is because Malaysians have less faith in the currency. They probably always had thought that the ringgit would weaken over the long term, something that policy makers should take note of.

Another reason is that investments outside the country in assets such as property give better returns than similar assets in the domestic market. For instance, property in the United States gave double-digit returns a year ago. In Australia, rental yields are said to be more than 7%, while property in the United Kingdom is giving returns of 5% or more.

The pattern of a continuous build-up of foreign currency deposits is not so prevalent for businesses.

According to Bank Negara statistics, the foreign exchange deposits held by enterprises, which most probably are their proceeds from exports, was at RM17.88bil in 2007. Today it stands at RM71.165bil.

But the data showed that there was no continuous increase in the foreign currency deposits month after month.

In some months between the period of 2010 and mid-2014, when the US dollar was weak, the foreign currency deposits held by businesses dipped.

Only after December last year did the foreign currency deposits held by businesses jump. It was RM58.74bil in December last year. In July this year, it was RM71.165bil.

Most exporters are holding back from converting the foreign exchange proceeds into ringgit to ride on the upside of the US dollar. Until the Federal Reserve decides on the interest rate, the speculation will persist on the ringgit further weakening against the dollar.

But how low can the ringgit go? Another 10% based on current levels?

If that happens, it would push the exchange rate to almost RM4.80 to US$1.

But a strong dollar is bad for the US economy. Keeping the dollar strong is obviously not the Fed’s intention. It just wants to normalise the interest rates that have just been too low for too long a period. The Fed does not want to derail the growth in the US.

Considering the circumstances, further upside in the dollar is diminishing. Likewise, downside in the ringgit is also limited.

Surely exporters know of this and are probably considering when to start converting their foreign exchange deposits into ringgit.

As for individuals, the bulk of the foreign currency deposits went towards buying property overseas in places such as the UK, Singapore and Australia. A year ago, the exchange rate was favourable for Malaysians. Against the pound sterling, the ringgit was at 5.50 or less and almost at 3.20 against the US dollar. The ringgit was way below the three mark against the Singapore dollar.

Now, it is much more expensive for Malaysians to splash out on foreign property. The pound sterling is almost at RM6.70, while the Singapore dollar is about RM3.10. It certainly is less affordable for Malaysians to purchase property abroad.

Going forward, the amount held by individuals in foreign currency deposits should be coming down, or at the very least, it should not be increasing steadily month after month like what had happened between January 2007 and July this year.

As for businesses, the cheaper ringgit will only make their products more competitive. Already, crude palm oil has benefited from the weak ringgit. Manufacturers such as component suppliers to electrical and electronic products are seeing an increase in their exports.

After the 1998 economic crisis, the ringgit only started to improve against the US dollar in 2006. This was because the 3.80 peg to the dollar was removed only in 2005. Had the peg been removed earlier, the ringgit would probably have appreciated earlier.

From 2009 onwards, the ringgit significantly rose against the US dollar.

This was because of the US embarking on its Quantitative Easing that made its currency weak. Now, the same is happening with the ringgit. It is already weak. Its downside looks limited. However, the upside will not come overnight. It will take time.