Wednesday April 7, 2004 - THE sharp appreciation of the Indian rupeeagainst the US dollar is working to the advantage of Malaysian palm oilexporters and construction services companies.
Like the Japanese yen, the rupee has risen to a four-year high against thegreenback. Indeed, the yen and rupee are the two best performers amongAsian currencies this year, and their values relative to the ringgit havesimilarly moved up as the Malaysian currency is pegged to the dollar.
The rupee surged 1.18% in a single day on March 31 after the ruling partyin India said it favoured a steadily strengthening currency. It has movedup 4.2% so far this year, after gaining 5.2% last year.
The underlying factor behind the rupee's strength is the robust growth ofthe Indian economy, which expanded by 10.4% in its third quarter ended Dec31, 2003. India was Asia's fastest growing economy in that quarter,beating even China, although economists expect the pace to moderate to 8%in subsequent quarters.
With a higher-value rupee, the Indians will be paying less for the palmoil they buy from Malaysia.
Malaysian contractors that are building infrastructure in India are alsobenefiting because they are paid in rupees which they can convert intomore ringgit when they bring home the profits.
Or they could make translation gains on paper if their rupee profits areretained in India.
United Plantations Bhd's executive director for finance and marketing,Martin Bek-Nielsen, said the stronger rupee may lead India to import morepalm oil from Malaysia. So far this year, there has been a reduction inimport by India due to a strong crop in its own vegetable oils. The bumperharvest contributed to the country's strong GDP.
But its palm oil imports may increase.
With the same amount of rupees, India will be able to buy a larger tonnageof palm oil, which is priced in US dollars.
In addition, its strong GDP would lead to larger purchases, Bek-Nielsensaid. This is a pattern typical of developing countries.
Palm oil will not, however, become more competitive relative to soya beanoil as both are priced in dollars.
An executive of a speciality oils and fats company expects the strongerrupee to translate into larger imports of oils and fats by India,especially between May and September, in preparation for the Deepavalifestival in November.
Last year, India was the third largest importer of Malaysian palm oil,with purchases of 1.6 million tonnes, after China (2.5 million) tonnes)and the European Union (1.7 million tonnes).
IJM Corp managing director Datuk Krishnan Tan said the group would becollecting toll in rupees when its two toll highways in India arecompleted later this year.
In addition, IJM is constructing two highways for which the fixed contractsums will also be paid in rupees.
It is also paid in the same currency for the houses it is selling in itsproperty development activity there.
Tan, however, does not expect the profits to be brought home just yet. Ourbusiness there is growing. We need the capital there.
Gamuda Bhd's general manager for business development, Wong Mun Keong,said there was no revenue impact yet from the rupee's appreciation. Thecompany, in joint venture with WCT Engineering Bhd, is constructing twohighways in India.
They will be paid by the Indian government in rupees but the payment willbe made over a period of 15 years under an annuity scheme.
The loans taken by these companies were in rupees, so there is a naturalhedge against revenue.
Road Builder Holdings Bhd is building three highways in India and,according to group joint managing director Low Keng Kok, its rupeeearnings are being retained in India.
As he pointed out, construction is very capital-intensive in India. InMalaysia, on the other hand, the main contractor needs less equipment.
Here, much of the work can be sub-contracted out, but not in India. We doeverything from A to Z there. In Malaysia, we can just order concrete.There, we produce our own. That allows us to control delivery on schedule,Low said.
Bina Puri Holdings Bhd's chief operating officer (finance), Cheah BanSeng, said the group had an ongoing project in India, after completingthree projects there so far. There would be translation gains from therupee's appreciation, he added.
According to an official of a consortium led by the Construction IndustryDevelopment Board (CIDB), the strong rupee augers well for Malaysiancontractors that have build-operate-transfer projects in India.
The loans for these projects are in rupees but the equity that went in wasin US dollars, which means the contractors will get a higher return oninvestment from their projects, he said.