Cover Story: Can a non-internationalised ringgit still come under speculative attack?

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This article first appeared in The Edge Malaysia Weekly, on November 21-27, 2016.


MENTION George Soros and anyone who was of age during the 1997/98 Asian financial crisis will remember him as Tun Dr Mahathir Mohamad’s foreign nemesis and the very public spat they had. Thanks to the former prime minister, the billionaire trader became the face of the many faceless currency speculators who were preying on Asian currencies.

Faced with high foreign debt-to-GDP ratios, Thailand and Indonesia were among those hardest hit in July and August 1997. Malaysia’s then bellwether Kuala Lumpur Stock Exchange was also hit and the ringgit skidded from RM2.50-levels against the greenback in 1996 to above RM4-levels.

It was then that Malaysia audaciously chose to impose capital controls and peg the ringgit at 3.80 to the US dollar. The move to make offshore trading of the ringgit illegal in 1998 also made it a lot tougher for speculators to profit from short-selling the ringgit. The controversial suspension of the Central Limit Order Book (CLOB) also affected overseas investors, especially those trading from Singapore. It was also then that countries like Thailand and South Korea ran out of foreign reserves defending their currency and meeting foreign capital repatriation needs.

Two decades on, the ringgit is still a non-internationalised currency, which means that any ringgit trades outside Malaysia are not recognised by Bank Negara Malaysia.

While the ringgit can still be hit by speculative activities, the non-internationalisation of the ringgit “is one protection that we have that would already prevent the kind of destabilising forex market [activity seen] in 1998”, Bank Negara assistant governor Adnan Zaylani Mohamad Zahid told reporters last week.

According to him, events such as the 2013 “Taper Tantrum” resulted in huge one-way bets in the offshore market and prices there can quickly spiral the wrong way when sellers disappear. Such situations can force buyers — including currency speculators — to close out their positions in the onshore market, causing unnecessary strain on the onshore ringgit market.

“[The non-deliverable forward market] has a strong influence on our market and we [the central bank] cannot see what goes on in that market … It is a situation we can no longer tolerate,” Adnan said, adding that Malaysia welcomes genuine hedging activities to be done onshore.

Already, the little data that the central bank has on offshore trading of ringgit non-deliverable forward (NDF) indicates that average daily volumes can be as big as US$12.8 billion or more — larger than the US$8.1 billion average volume seen onshore, Adnan said. What’s more, the average bid-ask spread for NDFs being traded at major financial centres such as Singapore, London, Hong Kong and New York are larger than that seen onshore.

This is why Bank Negara will no longer allow local banks to say they have no idea whether their clients are trading ringgit NDFs: Foreign banks — which are among the market makers for NDF trades — have to sign written commitments saying they will not engage in NDF-related transactions if they wish to trade onshore.

“The moral suasion applied on domestic and foreign banks to curb the NDF market will help to dampen speculative activities. Shoring up onshore dollar market liquidity is important to allow orderly withdrawal of foreign capital from the domestic market as well as to prevent speculative currency attacks as the current situation is not much different from precious capital outflow episodes such as the global financial crisis in 2008/09, the Eurozone sovereign debt crisis in 2010 and the ‘Taper Tantrum’ in 2013,” says Dr Yeah Kim Leng,  economics professor at Sunway University Business School.

As at last Friday morning, six of the “less than 20” foreign banks have handed in those written commitments, Adnan said. While other central banks with non-internationalised currencies, including China and Indonesia, have made strong statements to discourage NDF trading, it is understood that Bank Negara is the first to require a written commitment.

“There is concern that actions to curb NDF while in the spirit of dampening ringgit speculation, may send a negative signal to other investors, particularly the long-term bondholders. There needs to be careful management of the situation so as not to scare the real investors away,” an observer says.

Adnan admitted that Bank Negara could improve its communication and will continue to engage with market players to ensure that everyone is on the same page. Allaying concerns on capital controls, Adnan says Malaysia remains an open economy where genuine investors are “free to come and go”.

”The situation and conditions are vastly different [from the 1998 Asian financial crisis] ... Even if we contemplate [capital controls], it is far too damaging and too risky for the economy ... I just can’t see that. So definitely no capital controls. There is no discussion of moving in that direction but what we’re trying to do is have a targeted measure to try and contain the offshore NDF market,” he said, adding that the central bank is accelerating plans to make it more attractive for both foreign and local players to trade forex onshore. These measures, which may include sandboxing forex trading activity, will be introduced by early next year.

Still, confusion from Bank Negara’s Nov 11 directive to locally-licensed banks (including locally-licensed foreign banks) to ignore offshore ringgit rates when setting their ringgit reference rate have driven the ringgit past 4.40 to the greenback.

A major concern is that foreign holders — which held about 51.3% of total outstanding Malaysian Government Securities as at 3Q2016, up from 49.8% in 2Q2016 — will sell and take their money out of Malaysia. Here, Adnan reminds that “60% to 70%” of holders are long-term investors such as pension funds and central banks. Malaysia also has sizeable public institutions that can absorb papers should there be an oversold situation, an observer says.

Adnan said the central bank has been intervening in the market and still has “comfortable” reserves. It will be known this Tuesday (Nov 22) whether reserves were significantly depleted post-Trump Dump.

At US$97.8 billion (RM405.5 billion) at end-October, Bank Negara’s foreign reserves are 1.2 times short-term external debt and 8.5 times retained imports. The reserves level, which is up 4.8% from US$93.3 billion in end-September 2015, is also the highest since June 2015 when it first slipped below the psychological US$100 billion mark.

Bank Negara’s reserves were still 31% below US$141.43 billion in May 2013 before it was hit by the “Taper Tantrum” as investors pulled money from emerging markets when the US Federal Reserve first said it would cut back on its bond purchases. Reserves also fell between September 2014 and September 2015 on concerns over contingent liabilities and the government’s coffers after Brent crude oil halved from over US$100 per barrel in late-2014 to US$28 in January this year.

The ringgit closed lower at 4.4183 against the greenback last Friday (Nov 18) on the onshore spot market compared with 4.2017 on Nov 8, ahead of the US presidential election. Comparatively, the offshore one-month ringgit NDF rate was at 4.4462 to the greenback, down from as high as 4.5848 intraday on Nov 11, Bloomberg data shows.