Brexit will have minimal impact on Malaysia

23 Jun 2016 / 05:37 H.

    PETALING JAYA: Britain votes today on whether to leave or remain in the European Union (EU) and with polls showing an equal chance for either eventuality, analysts opine that a Brexit will have minimal impact on Malaysia.
    Brexit, a combination of the words “British” and “exit”, refers to the departure of Britain from the EU.
    “We opine that Brexit has marginal impact on the economic fundamentals of Malaysia but more on financial markets due to negative sentiment. In the wake of Brexit, investors have fled to safety, which are the dollar, yen and bunds (German bonds), causing yield to plummet,” said MIDF Research.
    It said worldwide investors were risk-off, which saw equity market decline. Recall that a similar situation was observed during the euro debt crisis in 2011 and potential Grexit (Greece exit) last year.
    “Our baseline assumption is no Brexit, Britons will vote to stay. But even with Brexit, direct trade impact on Malaysia should be minimal. The UK was once our fourth biggest trading partner behind Singapore, the US, and Korea in 1990. Over time, the bilateral trade significance has declined.”
    Year-to-date, MIDF Research said, the UK has only contributed 1.1% to Malaysia’s total trade and ranked 17th out of 240 trading partners. “Similar to trade, we see foreign direct investments (FDI) from the UK and the EU in the near term to remain intact as it weighs more on medium to long-term factors.”
    As at first quarter 2016, the UK contributed RM1.9 billion of FDI or 9.3% of the total FDI stock. This was an increase of 54.1% compared with the same period in last year. In the same quarter, the EU was largest contributor to Malaysia at RM30.3 billion (39.0% of total FDI stock), a rise of 21.8% from last year’s figure.
    “However, we opine that FDI from this region will remain unaffected in the short term due to the fact that it involves more of medium-long factors. In contrast, portfolio investments like stocks, bonds, treasuries are more affected in the short term.”
    MIDF Research said the expected re-appreciation of the British pound should bode well for remittance of operating profits by Malaysian companies. Since the beginning of the year up to mid-April, the ringgit has advanced close to 16% against the pound, reaching a nine-month high of RM5.5026. Afterwards, the ringgit lost its gain and the pace has accentuated as Brexit fears seem to fade with momentum swinging on the ‘Bremain’ camp. In the past six trading days, the ringgit slid by 2.9% to close at RM5.9544 against the pound on Tuesday.
    “We expect the point to appreciate further as Brexit is unlikely. Malaysian companies operating in the UK could use this window to remit operating profits to ride on the translation gains arising from the decline of the ringgit,” said MIDF Research.
    Meanwhile, Kenanga Research said through trade links the direct long-term economic impact of Brexit on the Malaysian economy is minimal. This is because based on historical trade data, the share of Malaysia’s exports to both the EU and the UK in ringgit terms has dwindled substantially.

    The share of exports to EU used to be as high as 15.3% in 2001 but has so far reduced to 9.6% of total exports as at April this year. Meanwhile, the share of exports to the UK has shrank by more than triple to around 1.1% in April this year from more than 3.0% in 2000.
    It said the weaker pound would nevertheless help lower the cost of doing business and the education bill for most Malaysians.
    In the short term, however, the impact is most apparent in the capital market and is largely reflected in the performance of the stock market. This has resulted in a large net outflow of portfolio capital for the past eight weeks, averaging above RM1.0 billion.
    Kenanga said this has weighed down on the ringgit vis-à-vis the US dollar.
    “However, the depreciation of the pound ahead of the upcoming referendum to leave the EU has alternately given some relief to the weak ringgit,” it said, but noted that this may not be for long as the pound rebounded strongly against the dollar on news that “remain” camp has recaptured lead in polls.
    The result of the referendum is expected to be known by 2pm Malaysian time tomorrow.

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