The ringgit rout: Good or bad for Singapore?

The Malaysian ringgit fell to fresh historic lows upon news that crude oil prices had broken below the psychologically significant US$50 threshold. -- PHOTO: BLOOMBERG
The Malaysian ringgit fell to fresh historic lows upon news that crude oil prices had broken below the psychologically significant US$50 threshold. -- PHOTO: BLOOMBERG

This article was first published on Jan 7, 2015

SINGAPORE - The Malaysian ringgit, Asia's worst-performing currency in 2014, fell to fresh historic lows at the start of the new year on news that crude oil prices had broken below the psychologically significant US$50 threshold.

Even in the depths of the Asian financial crisis, the lowest the ringgit ever sank to was RM2.45 to one Singapore dollar in June 1998.

On Wednesday (Jan 7), one Singapore dollar could buy RM2.68, after the ringgit fell another 0.7 per cent.

This is the weakest the ringgit has been against the Sing dollar since at least 1981, according to figures from Bloomberg that only go back that far.

Here are three reasons why the ringgit is plunging:

1. Oil prices are crashing

Malaysia, a net oil and gas exporter, is the sole loser among emerging Asian economies from the drop in crude prices as 30 per cent of state revenues are oil-related, say Bank of America Merrill Lynch economists. They estimate that every 10 per cent drop in the price of oil takes away 0.2 per cent from Malaysia's gross domestic product.

2. The US dollar is strengthening

Asian currencies, including the ringgit, have weakened considerably against the US dollar as investors sell their emerging market assets priced in local currencies and buy dollar-denominated assers instead. The dollar is rallying in anticipation of the Federal Reserve raising US interest and because of the robustness of the US econommic recovery. Global funds reduced holdings of Malaysian debt by 5.8 per cent, the most since September 2011, to RM236.5 billion in November, Malaysian central bank data show.

3. Palm oil prices and exports are falling

Palm oil is another commodity on which the Malaysian economy is heavily dependent. Their prices fell 15 per cent last year, dropping in September to the lowest since 2009, as commodities across the board slumped because of the stronger US dollar and the fears of falling global demand.

To make things worse, Malaysia's most devastating floods in decades in December will see palm oil output slump by 20 per cent compared to November.

Here are three ways a plunging ringgit will impact Singapore's economy:

1. It's a windfall for Singapore shoppers and importers

"The weaker ringgit is good for Singaporeans who shop and eat in Malaysia," said OCBC economist Selena Ling. Lower prices there will also boost tourism to the country, she added.

Manufacturers and other businesses that import raw materials from Malaysia to Singapore will also pay less in Singdollar terms, Ms Ling said. Imports from Malaysia to Singapore were worth about $51.1 billion in 2013, according to official data.

2. Softer ringgit signals weakening Malaysian economy

On the flip side, a weaker ringgit reflects slower growth in Malaysia's economy, which is closely linked to Singapore's, said Bank of America Merrill Lynch economist Chua Hak Bin.

Barclays has cut its economic growth forecast for Malaysia to 4.5 per cent from 5.5 per cent, citing the drop in commodity prices and rising market volatility.

Malaysia is Singapore's biggest export destination, accounting for $66.8 billion or 12.2 per cent of our shipments in 2013.

3. Singapore businesses and investors in Malaysia may be hurt

The close Malaysia-Singapore economic ties mean that a weaker Malaysian economy could affect Singapore businesses with operations there, Ms Ling said.

"What people like is predictability. The sudden plunge will throw businesses' forecasting into disarray," she said.

Dr Chua said Singaporeans with property in Malaysia will see the value of their properties fall.

The Singdollar may also weaken as the ringgit is one of the major currencies that the Singdollar is influenced by, he said.

melissat@sph.com.sg