To discourage the trading of non-deliverable forwards offshore, the central bank has announced several initiatives to liberalise and deregulate the onshore ringgit-hedging market.
They include providing market participants the flexibility to hedge their US dollar and Chinese yuan exposures up to a limit of 6 million ringgit (Bt48 million) per client per bank, allowing resident and non-resident fund managers to manage foreign-exchange exposures of up to 25 per cent of their invested assets, and to broaden accessibility by foreign investors and corporations to the onshore forex 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 to refine the retention of export proceeds with incentives such as paying a special deposit rate of 3.25 per cent on converting export proceeds into the ringgit account.
This facility will be offered until December 31, 2017, subject to further review.
These measures are expected to help enhance the continuous supply of foreign currency in measured steps to create a liquid and deep onshore forex market.
A deep and liquid forex market is a precondition to developing a well-functioning onshore market to facilitate greater hedging flexibility to minimise exchange-rate risk.
The measure that requires exporters to retain up to 25 per cent of export proceeds in foreign currency, effective immediately, is a refinement from the “no retention limit” in the foreign-currency account, which has been in place since March 23, 2005.
The new measure does not apply to existing foreign-currency balances. It applies to export proceeds received after yesterday. The rule requiring all export proceeds to be repatriated 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 approval from Bank Negara Malaysia.
They can also manage the exchange-rate risk through hedging and un-hedging up to six months of their foreign-currency obligations.
A sweetener in the form of a higher rate of return of 3.25 per cent 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 view this measure as a step backwards, imposing a limit on the retaining of foreign currency is justified and warranted given the worsening imbalances in the forex market, if not a timely nip in the bud, will seriously constrain the development of a viable onshore forex market through ensuring continuous liquidity of foreign currency.
Despite enjoying strong trade surpluses over the years, only a small fraction of 1 per cent of the total accumulated surplus was converted to ringgit from 2011-15, down from 28 per cent during 2008-10.
This unhealthy trend does not bode well for the ringgit and for reserves accumulation.
The 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 forex market is vital given Malaysia’s sizeable trade volume and value. This will provide a big pool of forex to facilitate greater trade and investment.