Saturday, January 30, 2010

FDI impact on ringgit and stock market

DOES a drop in foreign direct investments (FDIs) have a negative impact on the currency and stock market? On the surface, it does not look like it for the stock market as the key barometer (then called KLCI index) had remained stable from 2001 to 2005, when there were net inflows.

The index rose steadily from the third quarter of 2006 before peaking in mid-January 2008 and then begin to decline to the most recent low in mid-March last year. There were net outflows from 2006 onwards although foreign investments picked up considerably in 2007 compared to 2006.

As for the ringgit, following its depeg from the US dollar on July 22, 2005, it steadily strengthened until the second quarter of 2008 when the currency started to weaken. The lowest was in early March last year before the ringgit strengthened again.

As far as the ringgit is concerned, what influences the currency’s movement is the interest rate, especially the benchmark overnight policy rate (OPR) set by Bank Negara, political stability and confidence in the economy with fluctuations in FDI having little direct impact.

The ringgit’s weakness was due to at least two factors – the March 2008 elections which saw the Government losing its two-thirds majority in Parliament and the loss of four states to a loose coalition of parties and the subsequent rate cuts in the OPR in November that year following the near collapse of the global financial markets.

Singular Asset Management Sdn Bhd managing director Teoh Kok Lin says fluctuations in investment by itself will not have a major impact on the currency or stock markets in the short to medium term.

“The currency and stock markets are influenced by other factors besides the flow of investment to the country and trying to pin FDI flows on the workings of both markets will be pretty tricky,” he tells StarBizweek.

However, Teoh says in the long-term, a persistent fall in FDI may have an impact on the stock market and the ringgit. “If a country is able to attract investments, its a reflection of its competitiveness,” he adds.

Teoh says this will help boost confidence and the long-term attraction of the stock market as more money enters the country.

Meanwhile, Inter-Pacific Asset Management Sdn Bhd chief executive officer Robbin Khoo says another way of making sense of foreign investments and how it relates to the stock market or currency is by looking at how decisions are made.

“Foreign firms may make a decision to penetrate the market here despite a currency exchange that may not be favourable to them,” he says.

Khoo says in general, most foreigners view Malaysia quite favourably but obstacles placed by Malaysians themselves are what is usually holding back competitiveness and therefore investments from abroad.

“Most foreigners are of the view that we’re not politically unstable (despite the current problems) but politically uncertain as we’re not consistent,” he says, adding that this does not go down well with trade relations much less investments.

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