Singapore first gained independence in 1965 but it was a good two years later in 1967 when its own currency, the Singapore dollar, was first issued.
The dollar was pegged to the Malaysian ringgit over the next six years till 1973. Since then though, the exchange rate for the two currencies have moved from S$1.00 is to RM1.00 to nearly S$1.00 is to RM3.00 today.
The depreciation of the ringgit against the Singapore dollar has been rather pronounced in recent times with the ringgit having fallen in value by 15% since August 2014. There are many Singapore-listed companies that have significant businesses in Malaysia. How might the movement of the ringgit affect them?
Juggling currency risks with rubber gloves
On the surface, a falling ringgit looks like great news for nitrile gloves manufacturer Riverstone given the fact that it is an exporter. The company’s products are sold in US dollars while it pays for most of its operations in ringgit.
But, the volatility in the ringgit may bring about rapid inflation, which would then add to Riverstone’s cost of operations. Also, the value of Riverstone’s assets would steadily diminish in the eyes of a local investor if the ringgit keeps sliding.
Hidden credit risks
Courts Asia, which sells third-party furniture, electrical, and IT products at its Courts stores, has been struggling with its business over the past few years. Malaysia is currently the firm’s second largest market, responsible for 34.8% of total sales in the quarter ended 30 June 2015.
As the firm distributes mostly foreign brands, there is a risk that most of its products may see an increase in pricing following the ringgit’s sharp decline. If that’s so, the products in the Courts outlets in Malaysia will become pricier for Malaysian consumers at a time when the country’s economy isn’t doing so well. It’s easy to see how this might affect Courts Asia’s future sales in Malaysia.
Meanwhile, Courts Asia also offers credit to its customers by letting them pay through installments. In fact, more than three-quarters of the company’s total revenue from Malaysia in the quarter ended 30 June 2015 came from credit-based sales. This would mean that the company has accounts receivables in ringgit.
With the depreciation of the currency, Courts Asia’s future cash inflow from the eventual collection of said accounts receivables will have fallen in value when converted to Singapore dollars (the company’s reporting currency).
A falling ringgit may benefit some companies in Malaysia, especially those in the export business. But, a volatile currency can be risky for every type of business residing in Malaysia.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.