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Malaysian business expansion on hold on falling ringgit, economic uncertainties

[ 28-09-2015 ]
Malaysian business expansion on hold on falling ringgit, economic uncertainties
Top gainers: The FMM syas exporters who source their inputs in Malaysia win gain most.

Top gainers: The FMM syas exporters who source their inputs in Malaysia win gain most.

PETALING JAYA: An uncertain global economic outlook and the continuous decline in the value of the ringgit have sent jitters through the Malaysian business community, with many companies putting on hold their expansion plans.

According to banking executives, new business-loan applications in the country, which is one of the key indicators of private-sector growth, have started to slow tremendously since the ringgit hit four to the US dollar in the middle of last month, and as prospects for the world economy dimmed further amid signs pointing to a deceleration of growth in China.

To put that into perspective, at least three bankers from different leading financial institutions in Malaysia had told StarBiz that they had not received any new business loan application in recent weeks.

“Many businesses are adopting a wait-and-see approach, as they are unsure of how the global economy will pan out in the medium term and how much lower will the ringgit go in the coming months,” a banking official said.

“Risks keep shifting. Any wrong move or response will certainly have a negative implication on their bottom lines, so it is likely that most companies do not see a point of making any major decision for the time being,” he explained.

The present situation as described by the bankers was in stark contrast to how things were just a few months ago, when robust business activities led to higher loan growth in the sector, outpacing that of loans to consumers.

Data from Bank Negara showed that growth in bank lending to businesses accelerated to 9.9% year-on-year (y-o-y) in July from 8.7% y-o-y in the preceding month. This was underpinned by purchase of non-residential property, working capital and construction. Loan applications by businesses were also higher, growing at 11.4% y-o-y in July, compared with 5.1% y-o-y the month before.

Bankers, however, said the numbers would likely show weakness in the coming months.

“We are now in a period of heightened volatility, so it is not surprising that businesses are putting on hold their expansion plans,” another bank executive said.

“For our industry, it will mean slower growth of loans to the business sector but we do expect things to pick up again when there is a little bit more clarity in the global economic outlook, and the value of the ringgit stabilises,” he added.

The ringgit was quoted at around 4.3 against the US dollar yesterday, down by about 19% since the beginning of this year.

A sharp slowdown in China’s economy has been particularly worrying due to the negative implications on regional trade and global commodity prices.

Last week, the International Monetary Fund (IMF) warned that a slower growth in China could pose a threat to global economic growth. The international lender had in July already cut its 2015 global growth forecast to 3.3% from its earlier forecast of 3.5%.

While there had been some business segments benefiting from the ringgit weakness, an overall slowdown in the global economy would hit every sector hard, bankers said.

In general, the weak ringgit would be positive on exporters, which include companies operating in the rubber glove and semiconductor sectors.

“Companies that export, but source their inputs locally will gain the most,” the Federation of Malaysian Manufacturers (FMM) said in an e-mail to StarBiz.

For these exporters, the FMM said, the decline in the prices of certain raw materials, in tandem with crude oil prices, had resulted in lower production costs, which were mainly denominated in ringgit, while sales in US dollar would support margins.

“Both factors combined would allow manufacturers some buffer to absorb rising costs in other areas such as labour and electricity,” explained the FMM.

But there other companies suffering due to the decline of the ringgit. For example, one Malaysian-based oil and gas services provider had recently locked in a one-year contract based on the assumption that the ringgit would average at four to a US dollar.

At that valuation, the contract was expected to give the company a profit margin of 5%. But with the ringgit now having depreciated beyond the supposed break-even level of 4.20 per US dollar, the executive of the company said they might as well “kiss profits (from the contract) goodbye”.

For small-and-medium-sized enterprises (SMEs), there were more losers than benefactors.

“Only those SME exporters are benefiting, but then again, not all of them are, as foreign buyers are now requesting for discounts,” SME Association of Malaysia deputy president Michael Kang said.

According to Kang, most of SMEs were losers, as their mainstay is in local market.

Similarly, for many construction companies, the weak ringgit has been a bane, according to Master Builders Association Malaysia (MBAM).

“A few months earlier when the ringgit was stronger, we had companies tendering for projects. But now that the currency has weakened, they are in a fix when it comes to accepting the award, as the cost of construction is higher,” MBAM president Matthew Tee said.

He pointed out that profit margins within the competitive construction industry were already tight to begin with; hence the weaker ringgit would make it even tougher for some construction firms.

“We actually have some members that are in a tough spot, as they are undecided on whether or not to accept the awards that they have won,” Tee said.