TOUGH times call for tough measures. Bank Negara Malaysia’s latest measures to stabilise the ringgit exchange rate against the US dollar is not really unorthodox or out of whack.
However, it will not be easy for exporters. But other countries have undertaken more extreme measures.
For instance in India, the government decided to demonetise the 500 and 1,000 denominated rupee notes overnight, causing havoc in the financial system.
Compelling companies to convert 75% of their export proceeds into ringgit is not something really out of the global financial architecture. Sri Lanka resorted to such restrictions for many years before easing the rules in May.
Effective last Monday, Malaysian exporters are subjected to such rules.
The primary objective is to prevent exporters from stashing away foreign currency that is required by the nation at the moment. Exporters tend to hold on to the foreign currency because of the general view that the ringgit would depreciate against all other major currencies over the longer term. Hence, keeping the proceeds in US dollars is a natural hedge.
However, this affects the nation’s international reserves in the longer term. Between 2011 and 2015, only 1% of exporters converted their foreign currency earnings into ringgit.
This is because of the lack of confidence in the strength of the local currency going forward.
The solution is progressive structural reforms on the economy to make it more competitive.
For Malaysia, the structural reforms of the economy, such as doing away with subsidies, started only four years ago. Efforts to seriously scale down government spending have been ongoing in the last one year when oil prices collapsed.
The belt-tightening measures were severely lacking when oil prices were high.
Nevertheless, it is good that the Government has not deviated from its goals of reducing its spending and doing away with subsidies.
However, until the fruits of the reforms are felt, the position of the international reserves cannot deteriorate severely.
It stood at US$98.3bil as at Nov 15. We have seen better times such as in 2012 when it was at US$139.7bil.
International reserves are always gauged in terms of their proportion to the country’s import requirements and ability to repay short-term debts.
In terms of trade requirements, Malaysia’s international reserves can fulfil 8.4 months of imports.
However, the international reserves translate to 1.2 times the short-term external debt of the country, which is not a healthy indicator.
Considering that the foreign investors are selling down on Malaysian government bonds and liquidating their investments in the stock market, the international reserves should come under pressure.
However, Bank Negara’s latest move to compel exporters to convert their proceeds should shore up the international reserves over the longer term. Hopefully, this would gradually improve the performance of the ringgit and more importantly, bring about some stability to the currency.
The one thing that increases the cost of doing businesses is when the currency is volatile. Since Bank Negara’s latest measures, the volatility of the ringgit has reduced significantly.
There is almost no difference in the US dollar-ringgit exchange rate in the onshore and offshore foreign exchange markets.
Hopefully, the reduced volatility will over time help improve the ringgit to reflect the fundamentals of the economy.
At the moment, the exporters are feeling the pain of measures introduced to stabilise the ringgit. Hopefully, the painful measures will bring about long-term gains to the country.
Otherwise, another weapon in Malaysia’s shrinking options to improve the perception and fundamentals of the economy will only be wasted.