KUALA LUMPUR, 2 Dec 2016:
Malaysia’s central bank announced new measures today to boost liquidity and encourage more domestic trade of the ringgit, as it looks to stem the currency’s recent slide against a surging US dollar.
Bank Negara Malaysia (BNM) said in a statement exporters could only retain up to 25% of export proceeds in a foreign currency, while the remainder must be converted into ringgit. Higher balances would need BNM approval, it said.
Exporters are also able to hedge and unhedge up to six months of their foreign currency obligations.
“Foreign currency arising from conversion of export proceeds will be used to ensure continuous liquidity of foreign currency in the onshore market.” The new measures will take effect on Monday.
“Over the long term, all these measures will help reduce volatility in terms of rebalancing demand for both foreign currencies and the ringgit. But, it will take time (for it to bear fruit) as it is a prospective policy.”
He said the imbalance in the onshore foreign exchange market had worsened. “Malaysia’s trade account during 2006-2010 saw foreign exchange converted to ringgit average 28%, but from 2011-2015, it was merely 1%.”
As a sweetener to keep more cash at home, BNM said all ringgit proceeds from exporters can earn a higher deposit rate of 3.25% per year. This facility will be offered until 31 Dec 2017, subject to further review.
Assistant governor Adnan Zaylani Mohamad Zahid said exporters are free to convert currency to meet up to six months of loan obligations not denominated in ringgit.
The new measures also state all payments among resident exporters should only be made in ringgit.
“Although reserves rose last month, the central bank seems to want to ensure it can boost them further through retaining 75% of exporters’ foreign currency,” said Trinh Nguyen, senior economist for investment bank Natixis based in Hong Kong.
“This is to ensure it can boost its reserve buffer through domestic sources.”
The ringgit skidded to 13-month lows last month as the US dollar surged after Donald Trump’s US presidential election win on Nov 8.
Malaysia and other emerging economies have seen a rise in capital outflows as foreign investors sell local stocks and bonds in expectations of higher returns in US markets if interest rates rise under Trump.
Last month, the central bank attempted to clamp down on offshore trade of the ringgit, which has plunged nearly 7% against the US dollar over the last two weeks and is Asia’s worst-performing currency.
While the central bank said the measures did not amount to capital controls, markets have remained jittery and its moves have had little impact, traders and analysts said.
Adnan said seven banks had said they would exit the non-deliverable forwards (NDF) market, and had discussed with BNM how to manage any impact on their investment portfolios.
“We are providing liquidity to the (onshore) market and will continue to do so as far as necessary. We do need to maintain liquidity in our markets,” Adnan said.
Among other measures, it said residents could hedge and manage foreign exposure with onshore banks subject to prudential limits.
Resident and non-resident fund managers can also freely and actively manage foreign exchange exposure up to 25% of invested assets.
It would enhance secondary bond market liquidity via commitments of market makers and rebalance demand of foreign currency.
Malaysian ringgit NDFs added to gains after the central bank announcement.
“Residents without domestic ringgit borrowing shall continue to enjoy flexibility of investing in foreign currency assets both onshore and abroad up to any amount.” Adnan said.
“This gives equal treatment for residents with ringgit borrowings investing in foreign currency assets whether in the onshore or offshore market.”
Adnan said the move is not meant to be a capital control. “In our view, it is certainly a liberalisation.”