For Singapore firms, falling ringgit brings mixed fortunes

Singapore

THE recent weakening of the ringgit to record lows against the Sing dollar could bring mixed fortunes for Singapore firms already doing business in Malaysia, but those which have not ventured in yet stand to gain from cheaper expansion and acquisition opportunities, business leaders said.

They noted that some services firms may face stiffer competition from their counterparts up north, but manufacturers, for example, can import raw materials from Malaysia for less.

Singapore companies with operations in Malaysia told The Business Times that they have taken steps to minimise their ringgit exposure.

The Malaysian currency was hovering at nearly 2.79 against the Sing dollar on Monday and Tuesday, the weakest it has been since at least 1981 - Bloomberg figures go back only so far.

The ringgit has depreciated by about 5 per cent since the start of the year, when it stood at 2.65; the dampening has taken place on the back of concerns over whether the Malaysian government can meet its financial obligations.

Business leaders told BT of the double-edged sword that the softness of the ringgit holds for them, even as it opens up opportunities for expansion, acquisition or relocation.

Singapore Business Federation (SBF) chief operating officer Victor Tay said: "Imports are now a lot cheaper. But Malaysia is also a huge market for us and goods sold to Malaysia are now more expensive. Some Malaysians may see our goods as less affordable and consider other sources in South-east Asia."

Association of Small and Medium Enterprises (ASME) president Kurt Wee said that local small and medium-sized enterprises (SMEs) offering professional services could be priced out by their rivals, for example. "It cuts both ways," he said.

To cope, SMEs should consider expanding into Malaysia, he suggested. "You have better economies of scale, better cost spread, a much bigger market and you learn to compete in both the Singapore and Malaysian market."

This could be an "opportune time" to acquire Malaysian businesses or assets, he noted.

SBF's Mr Tay said: "Coupled with domestic restructuring, relocation has become slightly more attractive and the ringgit weakness might accelerate that decision-making process."

But he added that the caveat here was that this is true only if companies believe that the weakness will last, since businesses tend to dislike volatility and uncertainty.

Singapore companies report that Malaysian consumer demand has fallen in the short term as a joint result of imported goods costing more and the country's goods and services tax (GST), which began in April. They said that they would seek to alleviate the impact by hedging or by trying to offset higher import costs with savings from the lowered operating expenses.

Stamford Tyres president Wee Kok Wah said that the mainboard-listed company, which set up its Malaysian arm in the 1980s, protects itself through hedging. "The Asian crisis was more difficult because we were not as well prepared," he said, adding that hedging was now "something continuous" for the firm.

Clinton Ang, managing director of privately held spirits retailer Hock Tong Bee, said that the weak ringgit and Malaysia's 6 per cent GST has affected business in the short term, but that the company does not practise hedging. However, it also does not repatriate any of its Malaysian arm's earnings back to the Singapore headquarters, which minimises forex conversion losses, he said.

Richard Eu, chief executive of traditional Chinese medicine firm Eu Yan Sang, said that its Malaysian unit - which contributes about a quarter of the group's revenue - is "fairly self-contained", and even though there may be a forex translation loss, "we just take it as it comes".

He also said that although Eu Yan Sang's Malaysian unit has to import raw materials, operation costs have fallen, so in the end, "things kind of even out, and we just try to keep the margins about the same".

"People have to continue buying stuff," he added.

The business chambers and banks advised firms to consider hedging to minimise forex losses. Wee Wei Min, head of treasury advisory at OCBC Bank, said: "We have seen an increase in customer enquiries relating to the declining ringgit. There will be continued volatility in the currency, given the challenges in the Malaysian economy, the risk of a downgrade in its sovereign rating by rating agencies and a strengthening US dollar."

The bank has thus advised its clients to hedge at least half their requirements in the near term.

Teo Kang Heng, managing director of the corporate advisory group for treasury at markets at DBS, said that many of its clients have already hedged their ringgit positions through offshore ringgit non-deliverable forwards (NDFs) - offshore currency forward contracts in which profits and losses are typically cash-settled in US dollars at maturity.

Maybank said in a note last week that the ringgit is at risk of softening further to between 2.80 and 2.82 against the Sing dollar, but could strengthen to 2.70 if the Sing dollar eases ahead of a possible United States interest rate hike in September.

UOB economist Ho Woei Chen said that he thinks the ringgit would end the year at 2.71 against the Sing dollar.

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