The boon and bane of a strong ringgit
The strengthening of the ringgit may bring some festive cheer to the economy but the question which arises from this is whether Malaysian exporters are affected and if so, to what extent
According to RAM Holdings Bhd group chief economist Dr Yeah Kim Leng, the strong ringgit indicates strong growth outlook and strong trade surplus.
Yeah's sentiments were echoed by Malaysian Furniture Entrepreneurs Association deputy president Richard Ko.
Ko said profit margins in the furniture export industry is between 3 and 15 per cent and the order process takes an average of two months.
"That is 60 days worth of currency fluctuation and volatility. For example, within the month of July, the fluctuation of the ringgit accounted to some 3 per cent. That 3 per cent is some companies' total profit margin," Ko added.
The lengthy duration of the order process and its subsequent foreign exchange (forex) volatility does not spare the palm oil industry either.
Malaysian Palm Oil Council chief executive officer Tan Sri Dr Yusof Basiron believes there will not be a fall in palm oil exports because of the strengthening of the ringgit but it depends also on how much risk the main players in the industry, specifically the refiners are willing to take.
"The demand for palm oil will not fall since it is a commodity in great demand but the amount of it being traded greatly depends on the volatility of the forex and the risk that refiners are willing to take.
Similar to the furniture industry, the palm oil industry have to take into account the 60 day period where they have to sell physical products and buy futures contracts, a process known as hedging.
"If the players do not take a risk, then they might not want to trade and that is when the level of exports will fall," Yusof explained.
Exports may cost more but for some companies, the cheaper import of raw materials means they are able to offset the cost and the value of the product.
Innerspace System Bhd, a manufacturer of premier decorative lighting is one such company.
With its factory based in China, its executive director Kwan Yoon Sin said the company will not be adversely affected as their products are manufactured in China, then shipped globally, thus bypassing Malaysia altogether.
"The only time we are likely to be affected is when ironically, we have Malaysian clients and our profit margins take a hit because although raw materials are in Chinese yuan when we import to Malaysia, the products suddenly become more expensive with the items being subjected to import taxes," Kwan added.
The majority of exporters trade in US dollar. The ringgit has been strengthening against the dollar by some 8.15 per cent from January this year to the current period.
When the ringgit strengthens, consumers inevitably have a stronger purchasing power which will see a surge in domestic demand for imports and conversely, Malaysian exporters will see their exports becoming more expensive, which consequently may lead to a fall in demand.
According to RAM Holdings Bhd group chief economist Dr Yeah Kim Leng, the strong ringgit indicates strong growth outlook and strong trade surplus.Yeah maintained, however, that exporters will feel the pinch whenever the currency strengthens.
"Imagine this. The same product will cost more compared to six months ago, for example. If exporters maintain their prices, they suffer. If they sell their products at a cheaper price, their profit margins are squeezed. It is a lose-lose situation for them," Yeah told Business Times in a telephone interview.
Yeah's sentiments were echoed by Malaysian Furniture Entrepreneurs Association deputy president Richard Ko.
Ko said profit margins in the furniture export industry is between 3 and 15 per cent and the order process takes an average of two months.
"That is 60 days worth of currency fluctuation and volatility. For example, within the month of July, the fluctuation of the ringgit accounted to some 3 per cent. That 3 per cent is some companies' total profit margin," Ko added.
The lengthy duration of the order process and its subsequent foreign exchange (forex) volatility does not spare the palm oil industry either.
Malaysian Palm Oil Council chief executive officer Tan Sri Dr Yusof Basiron believes there will not be a fall in palm oil exports because of the strengthening of the ringgit but it depends also on how much risk the main players in the industry, specifically the refiners are willing to take.
"The demand for palm oil will not fall since it is a commodity in great demand but the amount of it being traded greatly depends on the volatility of the forex and the risk that refiners are willing to take.
Similar to the furniture industry, the palm oil industry have to take into account the 60 day period where they have to sell physical products and buy futures contracts, a process known as hedging.
"If the players do not take a risk, then they might not want to trade and that is when the level of exports will fall," Yusof explained.
Exports may cost more but for some companies, the cheaper import of raw materials means they are able to offset the cost and the value of the product.
Innerspace System Bhd, a manufacturer of premier decorative lighting is one such company.
With its factory based in China, its executive director Kwan Yoon Sin said the company will not be adversely affected as their products are manufactured in China, then shipped globally, thus bypassing Malaysia altogether.
"The only time we are likely to be affected is when ironically, we have Malaysian clients and our profit margins take a hit because although raw materials are in Chinese yuan when we import to Malaysia, the products suddenly become more expensive with the items being subjected to import taxes," Kwan added.
The majority of exporters trade in US dollar. The ringgit has been strengthening against the dollar by some 8.15 per cent from January this year to the current period.
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