Once again, the government has stated: No peg. No capital controls.

This was very much muttered last week, when the ringgit crashed, like many other emerging market currencies, to an intraday low of 4.51 to the dollar.

It is heart-stoppingly close to the 4.885 levels last seen in 1998 when the then prime minister Tun Dr Mahathir Mohamad stepped in to peg the ringgit at 3.80 to the dollar. And continuing a trend of a declining ringgit.

We are, in fact, very near to the lowest point against the dollar in 44 years, which is also not the most auspicious of time (thanks, Trading Economics, which only tracks MYR/USD as far back as 1972).

The problem is, with a Trump government itching to pull the trigger on domestically (US) focused growth, the outlook for exporting countries with high levels of foreign-owned debt is not looking good.

A couple more hikes by the Federal Reserve and confirmation that the Trans-Pacific Partnership (TPP) is a goner and the outflows might turn into a gush.

So, why not re-peg the ringgit? Accompanied, of course, by the reintroduction of capital controls, since the amount of reserves we have on hand (US$98 billion at the end of October) is peashooter against the trillions available to leveraged funds.

Capital controls, after all, were used to great effect post-1998 to keep the currency in check, while helping to build our reserves.

First question: Price. At what level might the ringgit be pegged? 3.80? 4.40? And on what basis? Misprice, and all manner of distortions occur.

Second, reintroduce capital controls once again and we can say goodbye to foreign capital inflows. Once bitten, twice shy, as they say.

It just will not be cricket for a country which has well-intentioned initiatives to develop its capital markets and court the foreign capital that has been so essential to growth.

As HishamH, the EconsMalaysia blogger, stated pointedly in a Jan 29, 2015, post: Capital controls were costly, since a cheaper ringgit “hurt consumers [less purchasing power], stunted the growth of a still-fledgling financial sector and equity market, while also piss(ing) off portfolio investors who had kept faith with Malaysia even as the ringgit crashed”.

So, having established that an outright peg and capital controls are out of the question (for now), what do we do? How do we manage a further decline of the local currency if (US President-elect) Donald Trump delivers on his promises?

The painful fact of the matter is, these so-called non-deliverable forwards (NDFs) are truer measures of the ringgit’s value in the eyes of the world than the onshore market. And you cannot really prevent offshore banks from hedging their positions.

Less optimistic about the outlook for emerging market currencies, NDFs are effectively hedges against a falling ringgit in terms of locking in a spot rate as they unwind positions in local currency bonds — like MGS (Malaysian Government Securities) — which are more than 50% held by foreign money (51.3% in Q3 to be precise).

Some said that Bank Negara Malaysia governor Datuk Muhammad Ibrahim flinched in the face of the Nov 11 selloff, which saw the ringgit flirt with those lows. Hence, the “encouragement” to foreign banks at that time is to not engage in NDF-related transactions.

Bank dealers, being apparently directed to freeze relevant forex derivatives and spot transactions, had a mini-effect of capital controls, and the resultant stopper to trades hardly inspired confidence and caused more confusion.

And now, by forcing foreign banks to show supporting documentation that they are not engaging in NDF trades, these mini-capital controls are firmly installed.

So the problem — and it’s a huge one currently — is the divergence between the onshore ringgit price and that of the offshore.

If the peg/capital controls cannot and should not be re-imposed for the reasons stated above, then how much lower will the ringgit be allowed to fall?

A weak ringgit might be good for exporters in terms of the more competitive pricing. But the higher prices for imports could result in runaway — hyper, in fact — inflation.

The drop, if it gathers momentum, can only be managed to a limited extent: US$98 billion (RM429 billion), after which we run out of bullets. Some say that Bank Negara might defend the ringgit to around US$60-odd billion, or around half a year of retained imports before throwing in the towel. But that is of course pure speculation, which itself seems to be gathering momentum.

Just as well then that we have just signed RM144 billion worth of deals with the Chinese. In fact, some say that the truer amount is nearer RM300 billion, if the non-public government-to-government deals are included.

Being trade-related (not speculative activity), these funds, as they come in, will be useful in halting the ringgit’s fall.

But the Chinese will also be keen to understand how Bank Negara deals with the ringgit. They will eventually want to repatriate their yuan funds back home, which in turn will turn on the ringgit’s value.

So, tough position right now for Bank Negara and all Malaysians. It is also interesting that so soon into his tenure, this is shaping up to be a defining moment for “MI”, the fond nickname for the Bank Negara governor.

Wonder what is going to happen next.

Khoo Hsu Chuang is contributing editor at The Edge Malaysia

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