KUALA LUMPUR: Bank Negara Malaysia’s slew of measures to boost the onshore foreign exchange market liquidity will increase its foreign exchange reserves level, check the slide of the ringgit and improve demand for the local currency.
Market analysts have estimated that with an annual trade surplus of RM80 billion, this could mean RM60 billion could be converted into the ringgit. According to Bank Negara, the latest figure stands at RM90 billion.
Analysts have also revised their target for the ringgit, expecting it to be stronger by the end of next year.
According to UOB Bank, the odds for further dollar strength towards the high of 4.4770 last year had diminished.
The ringgit opened at 4.4495 yesterday and was traded at 4.4482 at 6pm against Friday’s close of 4.4532.
“From here, a move below 4.4200 would signal the start of a consolidation phase within a broad range of 4.4000/4.4680 for the next couple of weeks,” it said.
Affin Hwang Capital Research said Friday’s announcement of the foreign exchange measures indicated further pre-emptive steps and preparation for more volatile currency movements next year.
“We believe the steps taken by Bank Negara on the treatment of export proceeds will be important to build and accumulate possible higher foreign exchange reserves (especially in the US dollar), which can provide a safeguard against further weakness in the ringgit as well as prevent an excessive speculation in the foreign exchange market,” said economists Alan Tan and Lim Yee Ping.
Credit Suisse also agreed, saying the most significant part of the new measures was towards export proceeds.
Foreign exchange deposits had risen by only US$7 billion (RM31 billion) since 2014, which suggested repatriation rates were low to start with.
“Hence, if the policy was more strictly enforced, both in terms of repatriation and foreign exchange conversion, this should result in a rise in US dollar supply, helping the ringgit,” it said.
Hong Leong Investment Bank economist Sia Ket Ee said although the latest measures would stabilise ringgit trading, the situation rested on the US dollar, which had been affected by United States president-elect Donald Trump’s policies as well developments in the euro area.
Hong Leong warned that in the short term, foreign investors might still view Bank Negara’s measures as micro managing and decide to stay away from Malaysian assets until re-rating catalyst emerged.
But Malaysia was not alone in its action, said UOB Bank, adding that several central banks across emerging markets had also adapted their foreign exchange market operations to contain volatility and safeguard against risks arising from rising
US interest rates and commodity price declines.
Although Malaysia’s fundamentals remain stable, its perception has been affected over its reserve adequacy.
“Recent measures to curb speculative non-deliverable forwards (NDF) activity have also created uncertainty among key players which may trigger further sell-offs.”
Last year, during stress periods of bond outflows, there was upward pressure on the US dollar versus the ringgit and foreign reserves were at a low of US$93.3 billion as at September last year. Currently, the country’s foreign reserves stand at US$98.3 billion as at the middle of last month.
Foreign holdings in Malaysian Government Securities remain high at 51.5 per cent as at the end of October.
The research house expects the ringgit to trade at RM4.10 versus the US dollar by the end of next year.
Meanwhile, Bernama reports that RHB Research said the measures to enhance the liquidity of the foreign exchange market would likely lead to a more stable ringgit.
It said the onshore and offshore ringgit NDF markets appeared to be converging.
“First signs emerged last Friday evening as the ringgit closed at 4.45 against the US dollar in the domestic market, whereas it ended at 4.44 in the offshore market.
“This suggests that offshore banks were squaring off their NDF hedge positions as they slowly exit ringgit positions to avoid losses, following the speculative position taken in recent weeks.
“However, it remains uncertain as to how the ringgit NDF market will pan out,” it added.
RHB Research noted that overall, the measures announced on Friday were intended to promote a deeper, more transparent and well-functioning onshore foreign exchange market, whereby genuine investors and market participants could effectively manage market risks with greater flexibility to hedge on the onshore market.
In the near term, it said the moves were expected to provide support to the ringgit, as and when export proceeds were being converted into the local currency.
“However, demand for foreign currency to pay for imports and capital outflow could offset part of the gain, in our view.
“Over the medium term, we believe it is still more important to enhance confidence in the fundamentals of the Malaysian economy, to provide support to the ringgit.”
The requirement to retain only 25 per cent of export proceeds in foreign currencies would likely add to the cost of doing business, said the research firm.
“However, this may be a small price for Malaysia to pay, towards developing and deepening its onshore foreign exchange market.
“Furthermore, as Malaysia is a relatively small and open economy, we believe it makes sense for the country to have some exchange control measures to ensure a more stable ringgit,” it added.
Bank Negara’s measures to broaden the onshore foreign exchange market in a move to improve liquidity came into effect yesterday.