Why You Should Worry about the Falling Ringgit

Nice intriguing article from Dr Wealth...

Why You Should Worry about the Falling Ringgit

 You’ve seen the long queues at the money changers. People are taking advantage of the weak ringgit, buying it to fund cheaper trips up north. Here’s why you should be worried about the falling ringgit.

The last time the ringgit was this weak compared to the Singapore dollar was during the 1998 Asian financial crisis, when S$1 netted you RM2.66. Now, the currency is hovering in this estimated region and has the potential to fall even further. The falling currency has come at an opportune time – the holiday period. Enterprising holidaymakers in Singapore are whooping with joy, especially since it means your dollar stretches further in Boleh-land.

If this trend continues though, Singapore will be affected by the impending financial storm.

Why is the ringgit dropping?

Oil and gas is big business in Malaysia. Oil-related industries account for an estimated 40 percent of the country’s national coffers. The sharp decline in global crude oil prices, which has dropped by more than 40 percent in less than six months, have been huge body blows to the country’s economy. Supply has outstripped demand, which is bad news for any country whose major export is oil. This is why the ringgit is taking a beating on the global stage.

I keep hearing about this oil crisis. Isn’t it a good thing for consumers that oil prices drop?

In the short term, it’s great news. Theoretically, your petrol expenses, electricity bill, and any other bills that require burning million-year-old fossils will drop. If you’re thinking about a holiday, travel to a country that is heavily reliant on oil as that means the currency will be weaker against the Singapore dollar. Besides Malaysia, you might want to consider heading to Indonesia or even Venezuela.

Traditionally, when crude oil prices drop, the big boys in OPEC, the Organization of the Petroleum Exporting Countries currently led by Abdalla El-Badri of Libya and which produces 40 percent of the world’s oil, usually cuts supply so that crude prices remain at around US$100 per barrel. This time though, the 12 members have voted to continue pumping out their usual output of 30 million barrels a day, creating a glut of black gold that is slowly losing its lustre. Oil prices have dropped to around US$60 per barrel. The energy minister of the United Arab Emirates has even stated for the record that production numbers will remain unchanged even if oil prices fall below US$40.

I still don’t see why the falling ringgit and oil prices are bad for me!

Indeed, on the surface, it’s hard to see how dropping oil prices could be bad for the man on the street. But, hear me out.

Many analysts speculate that the reason why OPEC isn’t budging is simply because of a price war, especially with the US. The Americans have been flooding the market with oil shale, which has been estimated to add about an additional million barrels of oil a day to the market this year. Next year, US is planning to increase production, adding another additional million barrels of oil.

Besides the States, OPEC is also coming to terms with other countries such as Russia and Brazil coming into the market.

So, rather than cut production, OPEC is hoping that the low prices of oil will eventually curb production in the non-OPEC countries. It’s a war of attrition and the bigger members in OPEC have the financial muscle to ride the crisis until it ends.

Now, here’s the messy bit, which we’ll simplify in the next paragraph.

American energy companies have been borrowing a lot of money from banks, asset managers, and pension funds in the past few years. In fact, they are the “most prolific issuers of high-yield debt over the years”. Oil executives were certain that the oil bull market would continue. This emboldened them to borrow more money. Now, as oil prices continue to plummet, these companies will eventually default on their debts, affecting the credit markets. “If you can’t make your debt service, it starts to affect the credit markets, and everything revolves around the credit markets,” explains Larry Glazer of Mayflower Advisors. And as the saying goes, when America sneezes, everyone catches a cold.

Oh boy. This sounds like really bad news.

The situation is so chaotic that nobody can say with any absolute certainty what will happen in the next two years. Some analysts feel that the repercussions of the oil crisis are blown out of proportion while others are firmly in the opposing camp, predicting that the world is headed for another financial crisis.

The Singapore stock market has already reacted negatively to the oil crisis, when shares dropped one percent two days ago. If oil prices drop any further, be prepared to see stocks slump across the board. Singapore’s export-based economy will also be affected.

Is there light at the end of the tunnel?

One word – China. The Middle Kingdom is currently the world’s second largest net importer of oil. If OPEC decides during their next meeting that production will remain status quo, then we could see oil prices drop to less than US$40 per barrel, mirroring the price point of the 2008 financial crisis. However, if the Chinese state government decides to ramp up production that requires energy, then the demand will help to stabilise prices. The early signs aren’t good though. Chinese factory activity has slowed down.

So, what now?

A lot hinges on what OPEC decides to do in its next meeting, which is convening on 5 June 2015, or if they choose to hold an emergency gathering in the next couple of months to address the oil crisis. So, we recommend hanging tight.

Also, you might want to take a look at the clean energy market. We’re certain that it’s a good bet as the world weans itself off oil.

In the meantime, take advantage of the falling ringgit and make a couple of trips up north to snag a few good deals. You could really save quite a bit on your grocery shopping bills.