Bank Negara’s move does not mean ringgit has been internationalised
PETALING JAYA: Bank Negara’s latest liberalisation of foreign exchange (forex) rules is aimed at helping to ease trade transactions and does not mean that the ringgit has been internationalised.
“There have been many enquiries on this but it is more of a step to allow for ease of trade transactions,” said a source. “The ringgit is still not available outside of Malaysia.”
The Royal Bank of Scotland (RBS) said Bank Negara’s revamp of its forex controls was a liberalisation of forex, not capital controls.
“Therefore, it does not constitute an internationalisation of the ringgit. The primary objective is to facilitate trade settlement through reducing forex risk,” RBS said in a note yesterday. “It is a timely move, given the openness of the Malaysian economy to trade,” said AmBank in its special report yesterday.
“It effectively promotes the use of the ringgit as a currency for trade settlement with its major Asian trading partners and reduces the reliance on the US dollar.”
(Against a bullish economic scenario, major banks in Malaysia are projecting a double-digit growth in their trade financing business).
AmBank said the liberalisation of forex rules did not mean that the trading of the ringgit had been internationalised due to the following reasons:
The relaxation of forex rules is based on international trade transactions; and
Non-resident counter-parties to resident exporters have to maintain ringgit accounts with licensed onshore banks through which the trade transactions are carried out. This facilitates monitoring of flows by Bank Negara.
Under the new forex administration rules, a resident is able to undertake settlement of international trade with a non-resident in ringgit, in addition to foreign currencies.
Non-residents can convert and hedge foreign currencies into ringgit with licensed onshore banks or with the appointed overseas branches of banking groups of the licensed banks.
According to AmBank’s treasury and markets research, the abolishment of all limits on cross-border, inter-company borrowings gives the opportunity to source for competitive financing from units other than the firms’ parent companies.
This move may result in more inflows of longer term foreign direct investments into the country.
The new rules are expected to complement the development of currency hedging products in Malaysia.
The removal of threshold limits on hedging for current account transactions by residents with licensed onshore banks is expected to help improve volumes of trade flows in ringgit.
Forex hedging through local onshore banks is also likely to increase through this arrangement.
China’s foreign exchange trade system, which is affiliated with the People’s Bank of China (PBoC), also allowed the yuan to trade ringgit with PBoC offering a reference rate for spot trading, and a 5% allowable range from the reference yuan/ringgit exchange rate.
According to AmBank, challenges arising from these forex moves include:
Socio-political developments in Malaysia which impact the future development of the ringgit as a currency for trade settlement.
Local companies’ readiness to take advantage of the new regulations that allow the hedging of foreign currencies exposure, especially with the adoption of new accounting standards, notably the FRS139.
The availability of circuit breaker mechanisms if the 5% allowable range from the reference yuan/ringgit rate is breached.
Click here to read Bank Negara Malaysia statements
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