PETALING JAYA: The ringgit is expected to continue its strength against the US dollar this year with a full year average at 3.93 – 3.95, according to AmBank Research.
“For 2018, our base case US$/ringgit end-period fair value is 3.90 with the full-year average at 3.93 – 3.95, while our optimistic end-period fair value is 3.76 with the full-year average at 3.80 – 3.82, supported by strong fundamentals,’’ it said.
The research house said it expect the US$/ringgit, which appreciated by 8.6% in 2017 after depreciating by 4.5% in 2016, to remain strong in 2018, supported by macro fundamentals and lower risk aversion.
The US$/ringgit ended 2017 at 4.046 with the full-year average at 4.30, hitting close to our year-end projection of 4.05 and full-year average at 4.31.
A stronger ringgit is likely to pose challenges to the competitive edge of export-oriented industries in the global market in the manufacturing sector. More so if the export-dependent industries are price-takers in the global markets.
Such industries will face strong margin pressures. However, if these firms are able to source their inputs from abroad and supply the final product locally, they will benefit from a strong ringgit, it noted.
Meanwhile, the impact from a strong US$/ringgit can be muted if there is evidence of domestic manufacturers importing raw and processed materials which are converted into intermediate goods and then exporting the goods for further processing or final consumption.
Evidence of a strong co-movement between exports and imports will allow trade to be more responsive to the global demand as part of the global manufacturing network than to the exchange rates between the two currencies.
Besides, close co-movements between exports and imports allow for natural hedge and reduce the impact of ringgit’s movements.
“From our assessment, we are able to conclude that for every 1% change in the US$/ringgit, it will influence the sector by 1.66% after one quarter lag.
“Focusing on construction, the strengthening of the ringgit against the US dollar is expected to benefit the industry given that the activities in
this industry are broadly domestic-oriented with its output priced and consumed locally, though some of the inputs are imported.
“A strong ringgit against the dollar will lower the cost of imported inputs while the impact on its operating figures depends on the contribution from domestic activities apart from its exposure on imported contents.
“Our findings unveil that for every 1% change in the US$/ringgit, it will influence the sector by 0.65% after one quarter lag,” the research house noted.
As for the services sector, it said businesses in this industry with high import contents and limited reliance on exports will benefit from the ringgit appreciation against the dollar.
However, the research house said the business services industry will be partially hit by the appreciation given that shared services and outsourcing mostly involve export of services though they source most of the inputs domestically.
“Our analysis shows for every 1% change in the US$/ringgit, it will influence the sector by 0.47% after one quarter lag,’’ it said.
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