This article first appeared in Forum, The Edge Malaysia Weekly on September 19, 2022 - September 25, 2022
The recent fall of the ringgit against the US dollar has had many in the country voicing their concern as to imported inflation and even forwarding suggestions that the ringgit should be re-pegged against the dollar to avoid such volatility. Indeed, at the time of writing, the ringgit had fallen by 7.2% year to date. That is a huge movement. Other currencies against the ringgit have remained more or less where they are, even though many central banks have markedly raised their interest rates. Hence, some have asked, is it just a matter of time before the ringgit falls against other currencies too?
There is another matter that needs to be examined that relates to the same issue: whether the fall of the ringgit presages losses at Bank Negara Malaysia as it fights to moderate the ringgit’s movement.
The past many years, since the 1990s, have thrummed with rumours of foreign exchange (forex) losses at Bank Negara — once accused of losses to the tune of RM31.5 billion from 1988 to 1994 — that was investigated by a Royal Commission of Inquiry (RCI). The report was completed and matters extended for further investigation. The issue has since been categorised by the Royal Malaysian Police as requiring “no further action” due to the lack of evidence to pursue investigations.
As avid readers, we sometimes wander over to the esoteric and as a financial economist, it means going as deep and as wide as needed to find the answers to burning questions. It is always a joy to find a book written by a non-mainstream writer, and the fresh perspectives brought forward by M A Akinkunmi in Central Bank Balance Sheet and Real Business Cycles were eye-opening. The shocking revelation was the author’s claim that central banks do not have to follow accounting rules. This set us off to investigate whether some questions we have always had could have been answered by this.
We were happy to find that as far back as a decade ago, the Bank Negara Annual Report 2012 stated that the accounts were prepared in accordance with the Central Bank Act of 2009 and the applicable Malaysian Financial Reporting Standards (MFRS), and that the central bank complied as closely as possible with the requirements of the MFRS and its act. Then, of course, we have the Jabatan Audit Negara (National Audit Department) to keep things on the straight and narrow.
After checking, we came across a note under the category “risk reserves” in the accounts, that noted it was “Used to account for unrealised revaluation gains or losses arising from changes in exchange rates and market prices and to absorb any potential future losses resulting from unfavourable circumstances not within the control of the bank. The Exchange Rate Fluctuation Reserves, Revaluation Reserve and Contingency Reserve, which was presented in previous years as ‘Other Reserves’ have been consolidated and renamed ‘Risk Reserves’.”
That annual report also states that it defines market risk as follows: “Market risk is the exposure of the bank’s investments to adverse movements in market prices such as foreign exchange rates, interest rates and equity prices. Market risk is monitored on a daily basis and all of the investments and instruments will have a marked to market value. Investments are guided by a benchmark policy approved by the board of directors which reflects the long-term investment objectives and acceptable risk-return profile. ‘Active risk’ may be taken through investments and instruments that can be different from the benchmark though must be within approved investment guidelines. The degree of ‘active risk’ is measured and controlled through using limits that must be adhered to. Sensitivity analysis and stress testing are undertaken to assess potential marked-to-market losses from adverse movements and volatility in the market.”
The Annual Report 2021 said basically the same thing, hence it is obvious that if there are forex losses, one would find them within this category, specifically an entry called “movement in the year” which are specifically stated nowadays.
Thus, how has Bank Negara been performing? We looked at the years 2013 to 2016: All seemed quite well, (see Table 1) and then we turn towards 2017 to 2021 (see Table 2).
There were two years of losses (that is negative values in the year’s movements) for 2017 and 2018, both absorbed by the amount of risk reserves already there plus a small “Transfer from the Profit & Loss” side of things. Hence, all appears well.
Table 3 and Table 4 show the movement in the year against the changes of the ringgit against the dollar for 2013 to 2017. We can see how sensitive the financials are against forex movements of the ringgit versus the biggest-use currency in the world.
It appears that the linkage between RM/USD’s movements are random and poorly correlated to Bank Negara’s movement in the year (that is, the forex gains or losses) as it were. This, of course, can be due to proper management practices such as diversifying the assets under Bank Negara to avoid concentration risk and minimal operational intervention in the currency markets. The large risk reserves amount held ensures that losses can be absorbed. Congratulations to Bank Negara. There seems little to worry about the possibility of large forex losses for the central bank currently.
Nonetheless, as we had pointed out in our recent paper, “How Low Can the Malaysian Ringgit Go?”, there is a need to tame the volatility of the ringgit, and there are two ways to do that — either through direct intervention or through deepening the ringgit market. The first option, of course, means that forex losses could be visibly large at the central bank.
Malaysia, of course, does not need that.
Huzaime Hamid is the chairman and CEO of Ingenium Advisors Sdn Bhd, Malaysia’s financial macroeconomic advisory
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