FOLLOWING the measure to discourage the trading of non-deliverable forwards (NDFs) offshore, Bank Negara has announced several initiatives to liberalise and deregulate the onshore ringgit hedging.
These include providing market participants the flexibility to freely and actively hedge their US dollar and Chinese yuan exposures up to a limit of RM6mil per client per bank; allowing resident and non-resident fund managers to actively manage foreign exchange exposures of up to 25% of their invested assets; to broaden accessibility of foreign investors and corporates to the onshore foreign exchange market via the Appointed Overseas Office framework.
There are also measures to streamline equal treatment for residents with ringgit borrowings investing in foreign currency assets in the offshore and onshore markets as well as refine the retention of export proceeds with incentives such as paying a special deposit rate of 3.25% per annum on converting export proceeds into the ringgit account.
This facility will be offered until Dec 31 2017 subject to further review.
These measures are expected to help enhance continuous supply of foreign currency in measured steps to create a liquid and deep onshore foreign exchange market.
A deep and liquid foreign exchange market is a precondition to develop a well-functioning onshore market to facilitate greater hedging flexibility to minimize exchange rate risk.
The measure which requires exporters to retain up to 25% of export proceeds in foreign currency, effective today is a refinement from “no retention limit” in the foreign currency account, which has been in place since 23 March 2005.
The new measure does not apply to existing foreign currency balances. It applies to export proceeds received after Dec 5. The rule which requires all export proceeds to be repatriated back to Malaysia within six months from the date of export remains in place.
This measure should not be perceived as a restriction to trade as some flexibility will be given if exporters may want to hold higher balances subject to the approval from Bank Negara Malaysia.
They can also manage the exchange rate risk through hedging and unhedging up to six months of their foreign currency obligations.
A sweetener in the form of a higher rate return of 3.25% pa is offered to exporters placing the ringgit proceeds, to partly compensate for the cost associated with the lower retention of export proceeds in foreign currency.
While some viewed this measure as a step backwards, but viewed objectively, imposing a limit on the retaining of foreign currency is justified and warranted given the worsening imbalances in the foreign exchange market, if not timely nib in the bud will seriously constraint the development of a viable onshore foreign exchange market through ensuring continuous liquidity of foreign currency.
Despite enjoying strong trade surpluses over the years, only a small fraction of 1% of total accumulated surplus was converted to ringgit during the period 2011-15, marking a decline from 28% of total during the period 2008-2010.
This is an unhealthy trend as it does not bode well for the ringgit and reserves accumulation.
Trade surplus is a dependable contributor to reserves accumulation compared to other forms of capital flows, especially portfolio money which is highly susceptible to reversals.
Rebalancing of the foreign currency in the foreign exchange market is vital given our sizeable trade volume and value. This will provide a big pool of forex to facilitate greater trade and investment.
More importantly, this measure will help to provide a support to the ringgit via a steady accumulation of foreign reserves from the trade surplus.
It is estimated that the measure will translate into RM100bil equivalents of foreign exchange converted to ringgit.
Theoretically, this means a boost of US$23bil to Bank Negara’s foreign exchange holdings.
Bank Negara’s prompt policy intervention and refinement, including building firewalls and other backstops, as well as open communications, are pertinent to underpin confidence in the ringgit and prevent the market’s negative perception and sentiment.
Malaysia’s flexible exchange rate policy has served us well in managing currency volatility, adjusting to massive capital reversals during a few episodes of wide shifts in capital flows.
Bank Negara’s strong assertion of no capital controls and of not needing to peg the ringgit underscores its ability to deal with the ringgit’s short-term volatilities.
Lee Heng Guie is the executive director of Socio-Economic Research Centre.