A revival of offshore trades for the ringgit will translate into demand for the currency and Malaysian assets as global investors seek better returns from emerging markets against the backdrop of weaker dynamics in developed economies, acccording to currency strategists.
CIMB Group Treasury regional rates and FX strategist Suresh Kumar Ramanathan said allowing the ringgit be to be traded overseas again would result in the immediate strengthening and a higher level of capital mobility of the local currency.
“There will be demand for ringgit and Malaysian assets,” Suresh told The Edge Financial Daily in a telephone interview yesterday. On the flipside, market perception has it that offshore trades of the ringgit would throw open the currency to speculative attacks.
Nonetheless, Suresh said the situation depended on the kind of regulations which were put in place for the overseas currency transactions. He added that there should be no basis for speculative attack concerns if proper rules were in place.
In an interview with CNBC last Saturday, Prime Minister Datuk Seri Najib Razak had said Malaysia was “quite adaptive” and was open to the idea of reviving offshore trading of the ringgit should the policy be deemed helpful for the health of the economy. Najib had said local policymakers were monitoring the foreign exchange landscape closely and that most investors felt offshore trading of the ringgit was a not a key factor for their investment decisions.
“Most importantly, there is no restriction in terms of repatriation of dividends and profits, for example, and bringing in currency through the banking system.
“So, it’s not really a major factor, but we are open to it,” said Najib who believed Malaysia’s GDP would be able to register at least 6% growth this year as strong domestic demand and consumption mitigated the effects of a slower global backdrop.
Najib said the strengthening ringgit reflected existing fundamentals of the economy and the currency’s strength did not seem to be detrimental to the country’s exports. The premier had also indicated that the country’s existing interest rate policy was to ensure that the economy registered steady and robust growth but not to the point of creating asset bubbles.
Investors tend to place their money in a country deemed to have positive long-term fundamentals, but foreign funds can also come in due to the potential of quick gains which denote speculative elements in the local market. Anticipation that the ringgit will strengthen will spur overseas investors to acquire local assets such as stocks and real estate, hence, the appreciation of the ringgit due to demand for the currency.
This essentially translates into a double gain for foreign investors when they sell their assets as they will be able to reap both the currency exchange gains and capital appreciation of their assets. A stronger ringgit also translates into cheaper imports for the country, although a firmer currency could make exports less competitive against rival exporting nations’ goods.
Offshore trading of ringgit scrapped in 1998
Malaysian had initiated stricter foreign exchange rules during the 1997-1998 Asian financial crisis. On Sept 1, 1998, under the administration former prime minister Tun Dr Mahathir Mohamad, the country abolished offshore trading of the ringgit to contain speculative activities on the currency.
As such, holders of the ringgit in other countries would not be able to convert the currency into other currencies unless the funds were intended for the purchase of Malaysian assets. At the same time, Malaysian export and import transactions would have to be conducted in other currencies due to the inconvertibility of the ringgit. Restrictions were also imposed on the amount of ringgit and foreign currencies held by individuals moving in and out of the country to minimise speculation of the ringgit.
Local policymakers had also pegged the ringgit at 3.80 against the US dollar on Sept 2, 1998. That was scrapped on July 21, 2005, and replaced by a managed-float system which allows the central bank to monitor the ringgit’s value against a basket of currencies.
More recently, in August 2010, the central bank announced a series foreign exchange liberalisation which include the reintroduction of the ringgit as a valid currency for the country’s export and import transactions. With immediate effect, a resident is able to undertake settlement of international trade in goods and services with a non-resident in ringgit, in addition to settlement using foreign currencies.
Bank Negara Malaysia (BNM) said exporters and importers were free to choose the currency of settlement for international trade to facilitate the management of currency mismatches and reduce currency conversion costs.
Non-residents can convert and hedge foreign currency into ringgit with licensed onshore banks or with the appointed overseas branches of the same banking groups of the licensed onshore banks.
A resident company is now also free to borrow any amount in foreign currency from its non-resident non-bank related company, in addition to its non-resident non-bank parent company. Thus, all limits on cross-border foreign currency inter-company borrowings are abolished.
BNM said this was to provide greater flexibility on sources of competitive financing for the real sector as well as to enhance the management of financial resources within the corporate group. The limit on anticipatory hedging for current account transactions with licensed onshore banks was also abolished to facilitate more effective risk management by residents.
The latest measures, which had fuelled speculation that the ringgit may be traded offshore again, had resulted in a stronger ringgit.
This article appeared in The Edge Financial Daily, September 14 2010.
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