As the Malaysian Ringgit continues to slide, how will this affect Singaporean investors looking across the Causeway to grow their portfolios?
by Alfred Chia
Long queues have been spotted at Raffles Place, Chinatown and Golden Mile Complex. No, those in line are not there to purchase the latest limited edition of Hello Kitty; and neither are they hoping for a chance for a windfall at 4D.
Instead, they are queueing up for the weakening Ringgit, which is giving Singaporeans and PRs who plan to go on a holiday to Malaysia much to cheer about.
Holidays aside, the falling Ringgit does have widespread implications on the economic front.
Factors contributing to the declining exchange rate
As of 19 August 2015, the Ringgit has depreciated by 20.3 percent against the USD and 11.4 percent against the SGD vis-à-vis the exchange rates in January 2014. In the short span of a month (month-to-date), it depreciated by 7.4 percent against the USD and 5.3 percent against the SGD.
There are several factors contributing to the plunge:
• Falling oil prices
Based on a report by the OECD, 21.3 percent of total crude oil exports from the Asia-Pacific region in 2013 came from Malaysia, pointing to Malaysia’s position as one of the most important oil-producing countries in Asia.
Brent Crude oil prices, however, have plunged from a high of around US$115 on 19th June 201 to US$45 on 24 August 2015.
According to the Performance Management and Delivery Unit (PEMANDU), a unit under the Prime Minister’s Department in Malaysia, 30 percent of Malaysia’s Gross National Income (GNI) is derived from Oil and Gas activities.
The huge plunge in oil prices has drastically reduced the oil revenue for Malaysia.
• Domestic political situation
There is of course the domestic political situation which has gained international attention. The ongoing scandal surrounding 1MDB and frequent political attacks targeted at the Prime Minister, have added to the political uncertainties in Malaysia. This turmoil has cast doubts on the government’s ability to fully focus on economic matters.
• Declining reserves
Malaysia’s foreign reserves have fallen below the ‘psychological’ mark of US$100 billion for the first time since 2010 as the central bank has been tapping on its reserves to buffer the currency’s fall.
• Global factors
On the global front, there is much uncertainty in the macro-economic climate, contributing to the drag-down on the Ringgit. The unexpected devaluation of the Chinese RMB and the impending interest rate hike by the US Federal Reserve have cast gloom over the short-term prospects of the embattled Ringgit.
While it may seem that all appears to be doom and gloom for the Ringgit, there are other factors to consider when evaluating the situation in Malaysia.
• Resource rich
Malaysia is a resource-rich country. Crude oil is but one of the many things it exports. Apart from crude oil, the land of Malaysia is abundantly blessed with palm oil, timber and tin.
• Investments as a key growth driver
With the launch of the Economic Transformation Programme in 2010, investments were set as a key growth driver for economic expansion. Examples of huge infrastructure investments include the MRT project, the proposed KL-Singapore High Speed Railway, Pan-Borneo Highway and high speed broadband.
• Other positive factors
In addition to the two factors listed above, there are other elements that mitigate the seemingly negative outlook facing Malaysia today. Firstly, the labour market is sound and stable, with unemployment standing at 3.1 percent as of May 2015.
Goods and Services Tax (GST) was introduced for the first time in April 2015, and this will contribute to the Government’s revenue when executed efficiently. And while no one can predict the political development, Malaysia has been proven to be able to navigate itself out of tricky situations. As such, not all is lost.
Impact on Singaporean investors of Malaysian property
In retrospect, a Singaporean who had invested in a Malaysian property in 2000 and held the investment for 10 years, till 2011, would have made an estimated gross return of 53 percent (based on the general Malaysia Housing Index).
However, during that same period, the Malaysian Ringgit depreciated by 16% against the Singaporean Dollar. This led to a net gross return of 29 percent instead of the 53 percent projected. If the property was bought on leverage, the net effect of the fluctuation in exchange rates would have been far greater.
Of course, hindsight is always perfect eyesight, and the key to successful investment is to always project forward. Although headwinds exist, the weakening trend can be reversed when the tides turn in its favour.
So hypothetically, if one invests in a Malaysian property – with a bank financing of 70 percent – at the exchange rate of $2.95 RM/S$ and the Ringgit appreciates to $2.60 RM/S$; holding the property price constant, the return on capital will be 45 percent.
It is obvious that such an investment strategy is not for the faint-hearted and requires proper financial planning.
And while Ringgit will face further downward pressure in the near term, I do not think that the low exchange rate reflects its true value. There is much for the Malaysia government to work out but when all is resolved, the true value of the Malaysian Ringgit will emerge.
Alfred Chia is the CEO of SingCapital.
Disclaimer: The views and opinions expressed in the article are those of the author’s and do not necessarily represent the position taken by PropertyGuru and its employees.
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