Volatility of major currencies plays havoc

Local firms with overseas ops suffer big forex losses

PETALING JAYA: The volatility of major currencies in recent months, especially the greenback, has played havoc on the books of many local companies, resulting in a number of them, particularly those with operations overseas, incurring sizeable foreign exchange (forex) losses.

But this is not the major concern for most companies. What most Malaysian companies are worried about is the continuing weakening of the ringgit against the dollar, which will have significant impact on their operational cost as well as revenue and bottomline, say most analysts.

The ringgit has depreciated against the dollar quite markedly in recent months. Oil and gas as well as commodity prices have also fluctuated from extreme highs and lows, forcing companies to turn cautious on their purchase and expansion plans.

As at 5pm yesterday, the ringgit was 3.65562 to the dollar, which is not far in value from when the ringgit was capped at 3.80 during the 1998 financial crisis, until it was managed floated on July 21, 2005.

Chris Ng

The ringgit had risen to its strongest at 3.13 against the dollar on April 23, before going on a downtrend until now.

OSK Investment Research head Chris Eng said while forex losses were a valid concern, the continuing weakening of the ringgit against the dollar was a much bigger issue facing local companies.

Recently, a number of blue-chip stocks including Tenaga Nasional Bhd, IOI Corp Bhd, Malaysian Airline System Bhd and AirAsia Bhd had reported poorer performance in the last quarter due to forex losses or hedging.

Eng said the forex losses - admittedly substantial this time round, could be viewed as currency translation losses in the course of doing business.

“But the losses can be reversed out of the books over time, so long as these companies are profitable going forward,” he told StarBiz.

However, he said while the depreciation of the ringgit against the dollar would make Malaysia’s goods cheaper for the US, the cost of raw materials and manufactured components had risen substantially in recent times, hence eroding the profit margins of many local companies.

Moreover, he said with the global economic meltdown, demand for goods and services worldwide would contract, and export-oriented countries like Malaysia would be impacted.

“We expect the ringgit to strengthen against the dollar in the second half of 2009, which will provide some relief to these companies,” Eng noted.

An accountant with a local firm said the impact of forex losses to companies would depend on whether the losses could be realised or unrealised.

“In the case of AirAsia, the bulk of forex losses would likely be unrealised and should not impact the company significantly as the losses could be reversed out from the books,” he said, adding that such deductions were allowable under international accounting practices.

However, the accountant said when a company incurred forex losses due to hedging contracts purely to gain from currency fluctations and if the transactions were not required in the normal course of doing business, then the losses may be realised, hence impacting the company.

Standard & Poor’s (S&P) vice-president (equity research, Asia) Lorraine Tan concurred with Ng that the US economic downturn would extend to at least the second half of 2009.

Tan maintained that global economic conditions and currencies worldwide would remain volatile for some time and Malaysian companies should brace themselves for a rough ride.

She said S&P expected Malaysian companies’ financial performance in the fourth quarter and possibly in the first quarter of next year to moderate substantially due to slower growth.

“We expect slower economic growth, lower bond issuance but recession is not on the cards,” Tan said.

However, she said sectors with exposure to the US market, like manufacturing, would be more affected.

Overall, Tan said Malaysia was still more resilient than most other Asian countries to weather the tough times.