SGD:MYR. What is the exchange rate this week? Everyday the causeway is jammed packed. Getting from Johor Bahru to Singapore and vice versa can take up to 3 hours.
The traffic jam is in part contributed by the strong Singapore dollar versus Malaysian Ringgit as there are a few hundred thousand people who commute to work in Singapore to take advantage of the stronger Singapore dollar.
How will the Ringgit perform versus the Singapore dollar?
The performance of the currencies of Malaysia and Singapore is very much decided by the country’s monetary policy as well as its fiscal position, such as GDP growth rate, budget financing situation, Foreign reserves holding, debt level and confidence.
Factors that affects capital flows could hugely affect a country’s short term currency position as they distort the supply and demand of the currency.
Each country’s monetary policy maker will have 3 policy levers to manage: –
· Exchange Rate
· Capital control and funds movement
· Money supply & Interest rates
No one country can have all 3 levels of control, you can read more about this “impossible trinity” in finance.
Singapore’s Monetary Policy Stance
Singapore’s MAS focuses on maintaining price stability for facilitating economic development.
Trade dependent countries such as Singapore does not control interest rates to control inflation as exchange rate changes have a more direct impact on domestic inflation as most of our goods are imported.
In Singapore, in April 2016 MAS has adopted a neutral stance towards currency appreciation towards its major trading partners. This means that on an aggregate basis, it will intervene in the currency market to maintain the currency within a band such that it neither appreciates nor depreciates against a trade-weighted basket of currencies. However it will still depreciate against some currency while appreciating against the others.
Malaysia’s Bank Negara Policy Stance
Malaysia’s bank Negara focused more on managing interest rates for domestic economic growth and price stability. Bank Negara also enacted some form of capital controls in 2016 to restrict banks operating in Malaysia from trading on the offshore non-deliverable forward NDF market. Currency trading and hedging is only allowed on onshore markets. Bank Negara allows a free float of their currency intervening only to smooth out volatility.
A glance of Malaysia’s Fundamentals
Malaysia’s currency exchange is no longer pegged and allow to float within the onshore markets, this removes price distortion and hence removes one major opportunity to “Hedge” or arbitrage.
Both Malaysia and Singapore are slowing down, unemployment is also rising, however Malaysia still has an admirable 4.5% GDP (Jan 2017) growth rate. Both Singapore and Malaysia runs healthy trade surpluses and considerable foreign exchange reserves and are able to smooth out any currency fluctuation.
A macro snapshot at both economies and with the USA as a backdrop.
Table 1: USA, Singapore, Malaysia Macro Economic performance, March 2017, Trading Economics, iCompareLoan.com
Malaysia’s economic fundamentals are quite strong with a RED FLAG in household debt. Household debt is currently manageable with low default rate.
Singapore is Malaysia’s largest export market, accounting for 14% of Malaysia’s exports. Malaysia is Singapore’s 3rd largest export market. However there is little likelihood of either Singapore or Malaysia intervening in SGD:MYR currency exchange for trade or competitive purposes as many intermediate goods flow through both countries and end up as finished products.
There is not much likelihood of Singapore dollar being attacked by speculators in the near-term as all fundamentals look strong and there is not much arbitrage opportunity. Hence Sibor should remain low.
While Malaysia’s fundamentals are strong, it has some political unrest and it also suffers from an image problem. Speculators are probing for weakness and are busy sharpening their knives for the kill.
Short-term capital outflow causes Short-term weakness of the ringgit.
International economic media is quick to pour scorn on Malaysia’s need for self-determination and partial currency control such as restricting Offshore Non-deliverable forward (NDF) market. They claim that it restricts business’s and bank’s ability to hedge their Malaysian investment exposure and complained that the Onshore non-deliverable forward is not liquid enough for their liking.
For Malaysia, the solution to liquidity is to create a market maker in the onshore market place and not to review the offshore non-deliverable forward (NDF) market which is essentially a “offshore side-bet betting house” for speculators to “Infer” a value of the Ringgit and to short the ringgit.
Malaysia has government bonds – (Malaysian Government securities MGS and Government investment issue GII) maturing in 2017. Foreign holders of Malaysian Bonds will exert downward pressure on ringgit as some of these monies may exit the Ringgit market.
There is about RM 67 billion of bonds maturing and foreigners hold about 45% to 50% of MGS and MII, that is some RM30-35 billion of potentially outflow should they all exit the ringgit market. As uncertainty looms, Malaysian government will need to increase the yields to make Malaysian bonds more attractive to foreigners such as rising yield, hence many investors will likely roll-over and purchase the new issuance, capital outflow will likely be mitigated.
Singapore GDP is Momentarily Bigger than the Entire Malaysia GDP
An interesting point to note. Malaysia’s GDP in 2016 (based on 2010 prices) is MYR 1229.384 Billion versus Singapore’s SGD 402.1598 Billion. According to XE, SGD:MYR is 1:3.16968 (17 Mar 2017), hence Singapore’s GDP is now worth an estimated MYR 1274.74787 billion compared to Malaysia’s GDP of MYR 1229.384 Billion. A Singapore with 5m+ people now has a bigger GDP than that of Malaysia with a total population of close to 30 million people.
However this also means that Singapore is over expensive. Singapore exports although strong are predominantly via large conglomerates that are foreign owned. There is really nothing much to be proud of, they could move out as regional economies catch up.
Malaysia to become Attractive for Singapore SMEs to relocate Non Core Functions
As Singapore further restrict foreign workers with more and more levies from the W-Pass, S-Pass, businesses do not benefit from hiring foreign workers, Malaysian workers also do not benefit as hiring companies will suppress wages due to W-Pass and S-Pass costs.
This is a DOUBLE Whammy of Bosses do not benefit and Malaysian Workers lose out. The only winner is the Singapore Government through Levies & Taxes.
It is perhaps high time to consider moving some non core functions to Malaysia, in particular Johor to lower costs. Bosses have no levies to pay while Malaysian workers can get more work within Johor and avoid the daily commute.
Slight weakness in the Ringgit is expected in times of bond maturities and stability should return once Bond maturities are over and more phased out. The Ringgit could slightly weaken against the Singapore dollar in 2017 and stabilise towards the year end.
Continued strength in the Singapore dollar ensues that Singapore continue to be a source of funds for investment in and around the region.
Reading References: –
Malaysia’s control of NDF boomerang on it as foreign bond holders are unable to hedge their risks.
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