PETALING JAYA: Just when Malaysians are getting used to the strengthening trend of the ringgit against the US dollar in recent times, October so far seems to suggest the greenback is regaining some of its strength.

From a close of RM4.1190 to the dollar on Sept 30, the greenback has appreciated 5.3% hitherto this month to RM4.3360 at the time of writing, propelled by fading expectations that the Federal Reserve (Fed) would repeat its giant 50-basis-point (bps) rate cut, which led to a widespread selling of US Treasury bonds.

Of interest, economists and currency experts are shying away from making long-term predictions as to how the ringgit could fare against the dollar, with OCBC foreign-exchange (forex) strategist Christopher Wong acknowledging that there is two-way volatility ahead.

He said the up move of the dollar in October has been a result of a few drivers, including markets unwinding prior to a dovish expectation on the Fed’s rate cut trajectory and to some extent, even factoring in the plausibility that it may opt to hold rates at its next meeting.

“In addition, better US data on top of factoring in geopolitical tensions in the Middle East and also taking into consideration the US election risk premium are also possible reasons for the dollar’s appreciation,” he told StarBiz.

In the betting markets, Wong notably remarked that the Donald Trump-over-Kamala Harris spread has widened sharply in favour of former president Trump, which could heighten worries of tariffs, inflation and fiscal concerns.

“Trump’s proposed tax cut would add US$7.5 trillion more to US debt, according to estimates from non-partisan and nonprofit committees for responsible federal budgets.

“Defensive positioning or ‘Trump hedges’, such as going long on the dollar and gold while shorting the Chinese yuan may still gather traction in the near term, given the fluidity of election developments and geopolitical uncertainties,” he said.

Commenting on whether the October appreciation could again morph into long-term strength for the dollar, Wong opined that with the US presidential election around the corner and the Federal Open Market Committee meeting a few days after the election, developments will remain fluid, with traditional polls and prediction markets seeing growing divergence.

He said the election outcome will have implications on forex as shifts in fiscal, foreign and trade policies may occur, depending on whether Trump or Harris is elected as the next president.

“This itself is already a big unknown and can be binary for the dollar,” he said.

Briefly analysing both scenarios, Wong said a Trump win may see a play-up of US-China trade tensions and should inject some uncertainty to markets, implying that the downward path of the dollar may be bumpy and may even face intermittent upward pressure if US-China trade tensions escalate.

On the other hand, if Harris wins, it could signal more measured engagements with China, and volatility as well as uncertainty should ease.

“The dollar can trade on the backfoot and Asian, as well as high-beta currencies such as the Australian dollar, may find better support,” he said.

Meanwhile, economists Geoffrey Williams and Carmelo Ferlito believe the appreciation of the dollar is merely a normalisation process, with the former noting that external factors such as the intervention by Bank Negara to encourage repatriation of funds have significantly strengthened the ringgit.

Williams added that the clear change in the US rate cycle, ending months of speculation on when the rate cutting would be carried out, coupled with geopolitical tensions and the upcoming US election, also generated news and market reactions.

“These caused volatility in the market and now we are seeing a correction due to normal market activity,” he said.

Ferlito, who is also chief executive of the Center for Market Education, concurred by saying that financial markets react based on expectations and are thus emotional.

“Now that the emotion about the rate differentials has faded, we are seeing exchange rates normalising,” he said.

At the same time, Williams explained that the ringgit-dollar rate of around the RM4.80 level seen earlier in the year had clearly undervalued the former, but the Malaysian note’s appreciation to under the RM4.10 level against the greenback at the end of September was “equally unreasonable”.

He observed that the ringgit’s strengthening was very short term and its weaker standing earlier in the year was more protracted, while sticking by his earlier prediction that the current levels around RM4.20 to RM4.40 should be closer to fundamentals and are thus more sustainable.

“External factors outside of the control of Malaysian policymakers will always matter especially in the United States, but for now the domestic policy agenda is good,” said Williams.

Economics professor at Sunway University and adviser to the Finance Ministry Yeah Kim Leng said the dollar’s appreciation is due to the resilience of the US economy, which has tempered rate cut expectations, while anticipation of continuing inflationary persistence coupled with concerns over US deficit levels have led to the dumping of US Treasuries.

“The selling has caused yields to rise and the dollar to strengthen amid improving confidence that the economy is on track to a soft landing.

“Nonetheless, given the prevailing global uncertainties and its intensifying tension with China, the risk of a sharper-than-expected slowdown or downturn continues to cast a pall over the US economy,” he projected.

As such, he is of the view that the dollar is undergoing a temporary lull as US interest rates remain high with negative consequences on consumer and business borrowing, as well as further deterioration of the balance sheets of US banks.

Yeah added that the changing US Fed and market expectations leaning towards a “slower and longer” interest rate trajectory has caused currency markets to adjust accordingly.

“However, amid the ‘ups and downs’ in the currency markets, the dollar is expected to remain on a downward trend, in line with its monetary tightening cycle,” he pointed out.

On that point, Asia Pacific economist at Coface Nouri Chatillon said that further possible rate cuts should put downward pressure on the dollar, but the looming presidential election should dominate in the near term.

What is fascinating is that he said this will make it challenging to predict the short-term path for the dollar, given the highly uncertain election outcomes.

“Even if Trump wins, multiple factors could pull the dollar in opposite directions. His pro-business policies and the dollar’s safe-haven appeal could strengthen it, while his preference for faster Fed rate cuts might weaken it,” said Chatillon.

Source : https://www.thestar.com.my/business/business-news/2024/10/24/ringgit-greenback-pairing-more-viable-at-current-level

PETALING JAYA: While Budget 2025 introduced several key measures aimed at fostering economic growth and social equity, its implications on the labour-intensive sectors like plantations, particularly the palm oil industry, are raising concerns about the rising cost implications they face.

Among industry representatives who spoke to StarBiz, there’s growing concern that planters may face shrinking profit margins unless they can significantly improve efficiency or accelerate mechanisation efforts and improve yields.

This is no thanks to Budget 2025 measures like the increase in the minimum wage to RM1,700 (from RM1,500), the revision on foreign worker levies and mandatory Employees Provident Fund (EPF) contributions for foreign workers.

Although larger corporations may have the capacity to “withstand” these cost increases, smaller players are likely to feel the pinch more severely.

Moreover, with rising production costs, the palm oil industry could risk losing its competitive advantage to Indonesia, where labour costs are lower, they said.

On the bright side, Budget 2025 did adjust the threshold for the windfall profit levy (WPL), though it fell short of industry expectations.

The change will take effect on Jan 1, 2025, with the levy rate remaining at 3% on fresh fruit bunches.

As at press time, CPO was trading at the RM4,500-per-tonne level – a sharp increase from RM4,250 on Oct 18, also the Budget 2025 announcement day.

Incorporated Society of Planters (ISP) chairman Datuk Daud Amatzin, who described planters as “the unsung heroes deep in the jungle”, believes the Madani government has “forgotten” smaller planters in the budget.

“There is very little for us to be happy about in this budget. The only small blessing is the slight increase in the WPL threshold, but it’s nothing to shout about,” he said.

However, he added: “I don’t want to cry because we are professional and very resilient. In the face of volatile commodity prices, planters remain resilient by continuously increasing their productivity using available resources and tools,” he added.

When asked how much of a cost increase planters will see due to the earlier mentioned Budget 2025 measures, Daud said it is “huge”.

While the Malaysian Palm Oil Association (MPOA) acknowledges the government’s efforts to promote social equity and economic growth in Budget 2025, its chief executive Roslin Azmy Hassan said the proposed measures will inevitably raise operational costs across the palm oil industry, affecting both large corporations and smallholders alike. “These changes may challenge the industry’s competitiveness, particularly against other producer countries with lower labour costs,” he noted.

Malaysia is the second-largest producer of palm oil in the world, trailing behind Indonesia, and it provides about one-third of the global supply or some 18 million tonnes annually.

Roslin said that to maintain Malaysia’s position in the global market place, local plantation companies must prioritise mechanisation and automation as well as adopt sustainable practices to cut costs.

Similarly, Malaysian Palm Oil Council or MPOC chief executive officer Belvinder Kaur Sron said the Budget 2025 measures will inevitably raise production costs for palm oil in Malaysia, potentially affecting its competitiveness.

“To counter these rising costs, companies must prioritise improving their yields to offset the increased expenses,” she said.

In response to increasing mechanisation, ISP’s Daud said “it is not easy but we are working hard on mechanisation”.

“We are improving bit by bit but everybody needs motivation. I would have thought that Budget 2025 would have motivated us to mechanise further,” he said.

On the minimum wage hike, MPOA’s Roslin acknowledged it reflects the government’s intent to improve the living standard of workers amid the rising cost of living. But this is a challenge for the palm oil industry, which is labour-intensive and relies on manual labour for tasks such as harvesting and maintenance.

“The sudden increase in the labour cost could strain industry players, especially smaller companies and independent smallholders who may find it difficult to absorb these additional expenses,” he said.

In view of this, MPOA urged the government to introduce measures to mitigate the impact of the wage hike, such as tax incentives, subsidies or grants for companies that invest in worker welfare programmes or productivity-enhancing technologies like mechanisation and automation.

Belvinder pointed out that a significant portion of operational costs (up to 30%) in the sector comes from labour, so increased wages will directly drive up costs for upstream players.

She said smallholders (with 100 acres or less and account for 40% of total output), in particular, will struggle to manage these rising wages which will squeeze their profit margins unless they can boost efficiency through higher yields.

“While companies are transitioning towards automation and mechanisation to alleviate labour costs, the high upfront capital investment means smallholders will adopt technology at a much slower pace.

“The sector already faces added costs from certification requirements, and a higher minimum wage will only add to the financial burden for companies,” she replied.

While the hike in the minimum wage will increase production cost, Daud said “we are going to tighten our belts further”.

Regarding the mandatory EPF contributions for non-citizen workers, MPOA’s Roslin recognised this policy shift aims to extend social protection to foreign workers.

While MPOA supports fair treatment, he noted this will increase the cost of employing foreign labour, who are crucial in the palm oil sector due to a lack of interest from local workers.

“The additional financial burden may lead some companies to reassess their workforce composition or postpone hiring, potentially worsening existing labour shortages in the sector and impacting productivity. To address these challenges, MPOA recommends the government to reconsider its implementation. In addition, we encourage the government to offer incentives for companies that invest in the training and upskilling of foreign workers to help offset the increased costs,” Roslin said.

Meanwhile, ISP’s Daud believes the EPF contributions for a non-citizen is not necessary, due to the fact that “guest workers are here for a temporary period”.

On the upward adjustment to the WPL threshold, Roslin said it is “ insufficient to alleviate the increased operational costs stemming from other budget measures.”

This view is echoed by Belvinder, who noted that while it is a positive development, it falls significantly short of the industry’s expectations.

“A higher threshold would have been more appropriate as it would better align with the increased cost of production for crude palm oil,” she said.

Roslin meanwhile said MPOA advocates for a more flexible WPL framework that adjusts levy rates based on market conditions.

“A dynamic approach would provide relief during periods of low palm oil prices, ensuring companies are not overburdened in challenging market conditions,” he said.

This, he said, would help maintain the balance between generating revenue for the government and preserving the competitiveness of the Malaysian palm oil industry.

Source : https://www.thestar.com.my/business/business-news/2024/10/24/imperative-for-planters-to-improve-yields