THE second half of this year could see oil prices trading closer to the US$50 per barrel levels and if at that same time, the US dollar remains soft, the ringgit could edge towards 3.50 to one US dollar.

This is Maybank Kim Eng head of foreign exchange research Saktiandi Supaat’s assumption.

“Our sense is that in the second half of the year, there could be a potential of oil prices moving higher, closer towards the US$50 levels and if the dollar continues to be soft, there could be potential of the ringgit moving nearer towards our fair value of RM3.50,” Supaat tellsStarBizWeek in Singapore recently after the Invest Asean Singapore event, which ended yesterday.

“Our fair value remains at about RM3.50 even after adjustments and updates, but it’s also a function of how oil prices manifest over the next few months.”

However, on average for the most of 2016, Supaat believes that the ringgit will trade at between RM3.85 to RM3.90 against the US dollar.

“In the run-up to US Federal Reserve’s expected interest rate hikes this year, there could be intermittent periods where the dollar might strengthen and that might push the ringgit lower.”

“So eventhough our forecast looks somewhat flattish at 3.85 to 3.90, there could be periods that it might swing towards 4 again and then swing back down again, but on average it should be around the current levels, assuming oil prices remain around US$35-US$45 or so,” he says.

The ringgit has been strengthening against the greenback this year, trading at an eight-month high of 3.87 against the US dollar this week.

It had lost some 23% in value against the greenback last year even as falling crude oil prices piled pressure on Malaysia which is an oil exporter

Oil is currently trading at about US$40 per barrel.

Supaat also says that he believes that the inflow of foreign money, which has been coming into some parts of Asia in recent times is likely to continue.

“The point is that the general liquidity in the system even with US already hiking rates by 25 basis points in December is still very loose to some extent, so that has helped to push money supply into markets in Asia, particularly where there are high-yields,” he says.

“My sense is that where flows into Asia are concerned, yes you are seeing some speculative flows but increasingly we are also seeing longer-term flows like foreign direct investments into countries like Indonesia and Malaysia, increasingly it is becoming longer-term, rather than just hot money inflow.

“I think these flows into Asia will continue for as long as there is no major risk and issues in China and out of Asia because growth elsewhere is still quite soft and the lower interest rates (in most of the developed world) will continue.”

 

Falling asset turnover

Meanwhile, Maybank Kim Eng Research global strategist and head of research Dr Sadiq Currimbhoy also shared some of his economic views on the overall global economy.

Particularly, Currimbhoy who was one of the speakers at the Invest Asean Singapore event notes that asset turnover, which is basically how much sales every dollar of balance sheet generates – is falling sharply globally, particularly in the developed world.

“We found that the assets are generating less sales, there is a lot of excess capacity in the systems and companies that should have gone bust are still around!”

“What this tells me is that the developed world is struggling to expand its balance sheet and at the same time it is more leveraged, more so than it was prior to the financial crisis, so what’s the scope for the developed world to expand its balance sheet- pretty small right?”

“That basically means we can’t expect much from the developed world and China in the next few years and this has a few implications for Asean,” he says.

One, is that markets like scarce commodities.

“And the scarce commodity we think is Asean infrastructure where it looks sustainable from a demand perspective, and the fact that we could see our savings rates rise and our demographics fund part of that flow, so it’s sustainable plus we’re under levered. So there’s lots of scope to expand.”

The second part to that is how we view trade.

“A lot of the infrastructure that we are going to build here is trade infrastructure, and as we start getting into things like the Asean Economic Community, it can accelerate inter-regional trade and hence, the point that we need to improve logistics, transport and so on,” says Currimbhoy (pic).

Although foreign money has been flowing back into some emerging markets in recent months, he points out that the Asean region has had a pullback of foreign credit on the whole over the last 12 months.

“But what’s interesting is that while that’s happened interest rates have stayed low, isn’t that a good sign?

All things equal, governments could opt to raise interest rates when there is a pullback of foreign money in a bid to bring the funds back as higher interest rates translate into higher-yield returns.

Domestic savings

Because interest rates have stayed low, this is encouraging as it means that domestically, fundamentals appear to be holding up, according to Currimbhoy.

“It means that domestic savings are rising, it also means that things are responding, current account surpluses are there.”

“So, if we go back to the scenario in which if you‘re a global investor looking for something that is sustainable from a returns perspective, I think that’s where Asean has a chance,” he says.

Currimbhoy also makes another point in that Malaysia needs to improve the quality of its infrastructure in order to support higher economic activity.

Citing information from national accounts and the World Economic Forum, he points out that Malaysia has one of the highest infrastructure stock or income-generating assets per capita in the region but lags behind countries like Singapore when it comes to the quality of the said infrastructure.

“Malaysia looks extended, there is enough stock but the quality number is not that high. Data will tell you that you need to improve quality to have productivity-driven growth.”

“When we speak of quality, perhaps it’s the function of the pipes, it could be the telecommunication and transporting structures. We all know that that’s an issue in certain parts of Malaysia.”

In Maybank Kim Eng’s latest report entitled Asean Infrastructure: The New Old Thing, its analysts write that “strengthening infrastructure to support economic expansion is not just about pimp-priming to boost growth.”

“It is about efficiency and quality of the infrastructure, as well as getting the biggest bang for the buck... not just in terms of multiplier effect... but more importantly generating productivity-driven growth and creating business opportunities.”

They point out that railway is a “notable’ area of under-development/under-investment, and therefore is the largest area of business opportunity within the infrastructure space within the next five to 10 years with at least RM115bil earmarked for such projects up to 2020-2025.

In terms of the Asean region, they note that it needs some US$110bil per year until 2025 in infrastructure spend.

“Quality also extends to narrowing urban rural gaps, so that would be something that you would want to take into account when it comes to improving the overall quality – trying to eliminate those gaps,” says Currimbhoy.