This article first appeared in The Edge Financial Daily on December 12, 2017

KUALA LUMPUR: The central banks of Malaysia, Indonesia, and Thailand launched two trade settlement frameworks yesterday to enable direct settlement of transactions in their local currencies, to reduce dependence on foreign trading currencies like the US dollar.

“The completion and enhancement of the frameworks is an important step towards the use of local currencies to support cross-border settlements for trade and direct investments among the three countries. It is an opportunity to mitigate the impact of volatilities in major trading currencies on regional trade and investment activities,” Bank Negara Malaysia (BNM) governor Tan Sri Muhammad Ibrahim said in his speech during the launch of the frameworks in Jakarta, Indonesia.

“We can recall the global financial crisis, where the tightening of global US dollar liquidity was a contributor to the 19% contraction of total trade and 11.5% contraction of total inward FDI (foreign direct investment) into the region,” he noted.

Of the frameworks, one was between BNM and Bank Indonesia (BI), and one was between BI and Bank of Thailand (BoT). The frameworks were in accordance with two bilateral memoranda of understanding on local currency settlement framework signed between the three central banks, respectively, on Dec 23, 2016.

Further, the baht-ringgit settlement framework between BNM and BoT was expanded to include direct investment to enrich existing trade transactions. The framework was first launched on March 14, 2016.

“The establishment of these frameworks mark a key milestone in strengthening regional financial cooperation between BI, BNM and BoT,” the three banks said in a joint statement.

To facilitate the rupiah-ringgit framework, the appointed banks in Malaysia and Indonesia are: Public Bank Bhd, Hong Leong Bank Bhd, RHB Bank Bhd, CIMB Bank Bhd, Malayan Banking Bhd (Maybank), CIMB’s and Maybank’s Indonesian affiliates — PT Bank CIMB Niaga Tbk and PT Bank Maybank Indonesia Tbk — PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Mandiri (Persero) Tbk, PT Bank Central Asia Tbk, and PT Bank Negara Indonesia (Persero) Tbk.

To support the ringgit-baht framework, the appointed banks in Malaysia and Thailand are: CIMB Bank, Maybank, Public Bank, RHB Bank, Bangkok Bank Bhd, Bank of Tokyo-Mitsubishi UFJ Malaysia Bhd, United Overseas Bank Bhd Thailand, Bangkok Bank PCL, Bank of Ayudhya PCL, CIMB Thai PCL, Kasikornbank PCL, Krung Thai Bank PCL, Siam Commercial Bank PCL and United Overseas Bank (Thai) PCL.

In 2016, Malaysia shared a bilateral trade volume of US$13.8 billion with Indonesia, and US$13 billion with Thailand, said Muhammad.

“However, only 5.8% and 11.4% of our trade with Indonesia and Thailand respectively were settled in local currencies. This is an enormous business opportunity for the financial sector, which has yet to be realised,” Muhammad added.

Reuters reported that BI governor Agus Martowardojo said direct settlement means banks in the three countries could complete transactions without using dollars, improving their operational efficiency.