BNM measures likely lead to a more stable ringgit

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KUCHING: Bank Negara Malaysia’s (BNM) latest measures to broaden the domestic foreign exchange (forex) market to improve liquidity and depth of the onshore market, are likely to lead to a more stable Malaysian ringgit in the immediate term.

The measures came into effect yesterday following BNM’s recent attempt to curb the offshore ringgit market. It include the liberalisation and deregulation of onshore ringgit hedging markets, streamlining treatment for investments in foreign currency assets, and incentives and treatment of export proceeds.

“Overall, the announced measures are intended to promote a deeper, more transparent and well-functioning onshore foreign exchange market, where genuine investors and market participants can effectively manage their market risks with greater flexibility to hedge on the onshore market,” shared Vincent Loo, an economist with RHB Research Institute Sdn Bhd (RHB Research).

Within the announced measures, there will be a requirement to retain only 25 per cent of export proceeds in foreign currencies. In the near term, this move is expected to provide support to the ringgit, as it would increase demand for the ringgit.

Currently, the amount held by exporters in foreign currencies is estimated to be around RM94 to RM114 billion, with export proceeds from merchandise averaging about RM53 to RM57 billion a month during the first nine months of 2016 (9M16).

“With only 25 per cent of export proceeds allowed to be retained in foreign currencies, this would amount to about RM40 to RM43 billion a month, adding about 4 per cent to average daily forex turnover of around US$8 billion each day, and allowing for a steady demand and supply of ringgit and foreign currencies respectively each month,” he added in the research note.

It should be noted that this would only apply to all export proceeds for merchandise only, and not services, received on and after December 5, and would have no effect on current foreign currency balances.

Additional measures also included that effective December 5; all settlement of domestic trade in goods and services is to be made fully in ringgit, but BNM provided exporters some stability by allowing them to still be able to hedge and un-hedge up to six months of their foreign currency obligations.

Considering that between 2011 and 2015, only 1 per cent of the proceeds from exports were converted into ringgit, it is clear that most exporters have been retaining most of their proceeds in fear of further depreciation of the ringgit, which has limited somewhat the growth potential of a deeper onshore forex market for Malaysia.

Hence, this move would definitely bring about a boost to liquidity for the onshore forex market and contribute to a more stable ringgit, but would also likely add to the cost of doing business, which may lead to a lack of compliance from some export companies.

However, Loo opined that it would be a small price for Malaysia to pay in order for it to develop and deepen its onshore forex market, and combined with Malaysia’s relatively small and open economy, it is a sensible move for Malaysia to retain some exchange control measure to ensure a more stable Ringgit.

To address non-compliance, BNM has also introduced incentives in an pre-emptive move curb this by offering companies the option of placing their ringgit proceeds from exports in local commercial banks and earn a special deposit rate of 3.25 per cent per annum.

The research arm of Affin Hwang Investment Bank Bhd (Affi Hwang Capital) believes that this incentive is sufficient to convince exporters to comply, limiting the risk of possible transfer pricing by exporters, and hence, providing a valuable source of foreign exchange to the country’s international reserves going forward.

“As this facility of 3.25 per cent interest rate will only be offered until December 31, 2017, we believe this could possibly indicate that some of forex measures announced may not be permanent and likely to be reversed to the previous arrangements.

“Once there are clearer signs in the foreign exchange market returning to normal, where volatility in short term capital flows due to the shift in investor sentiments as well as portfolio rebalancing due to external events, it will remain more manageable,” said the research arm.

Another measure introduced by BNM was the liberalisation and deregulation of the onshore ringgit hedging market, which allowed managers to actively manage their foreign exchange exposure of up to 25 per cent of invested assets and a limit of RM6 million per client per bank.

To increase accessibility to foreign investors however, BNM encourages offshore non-resident financial institutions to participate in the Appointed Overseas Office (AOO) framework, which will be accorded additional flexibilities for ringgit transactions. The flexibilities include forex hedging for current and financial accounts based on commitment, opening of ringgit account, and extension of ringgit trade finance.

“The move, in our view, is meant to encourage hedging activities in the onshore ringgit markets, instead of being done offshore,” opined Loo.

Finally, BNM has also set out to streamline treatment for investment in foreign currency assets, by placing a cap on the amount that companies and individuals can invest locally or abroad in foreign currencies, local companies and individuals with borrowings are only allowed to invest up to RM50 million and RM1 million, respectively in foreign currency denominated assets in the domestic market.

Loo noted that these move would provide equal treatment to residents with ringgit borrowings investing in foreign currency assets, regardless of whether it is in the onshore or offshore markets.

While it is clear that in theory, all these measures by BNM are bound to help stabilise the current volatility of the ringgit while building our onshore forex market and increasing our foreign reserves, there is still concern as to whether these measures are sufficient considering our current uncertain and volatile financial environment.

Affin Hwang Capital observes that there has been concern on our capital outflows as the levels of foreign holdings in Malaysian Government Securities (MGS) remains high at 51.1 per cent as at end of October, suggesting that if the strength of the US dollar continues, it will likely lead to increased attractiveness of US dollar-denominated assets towards foreign investors.

This could potentially be an issue as it may prompt investors to further liquidate their Malaysian positions in anticipation of potential future losses from the ringgit, which further puts pressure on our currency. This concern seems to be lingering and has led to reduced market confidence, risking a potential en-mass exit of Ringgit held by Malaysians.

However, this maybe a non-issue as an economist who declined to be identified opined that “I think if the reduced market confidence on the ringgit over the past several weeks had not triggered a selldown by Malaysian residents, there is a high chance that they will not sell after the measures come into effect as it is meant to stabilise the ringgit.”