SINGAPORE (Aug 24): As the Malaysian Ringgit fell to a record three to the Singapore dollar this morning and plunged to MYR4.2620 to a US dollar before bouncing back a little bit, trading floors in Singapore were abuzz with what aces Kuala Lumpur holds now to stem the downfall of its currency.
“Everyone is now waiting for the word on what the Forex reserves are,” one trader at European bank in Singapore in Singapore told The Edge Singapore.
Last week, Bank Negara Malaysia, the central bank, reported that Malaysia’s forex reserves had fallen to US$94.5 billion ($133.5 billion) on Aug 14. Though that is three times the US$30 billion plus in reserves that Malaysia had at the start of 1997 Asian Financial Crisis, the country’s economy is now bigger and its import bill has more than doubled since then.
Moreover, forex markets look at the trend rather than the absolute number and Malaysia’s forex reserves have fallen from a record US$141 billion in May 2013 to US$94.5 billion.
In September 1998, Malaysia imposed capital controls and pegged the Ringgit to 3.80 to a US dollar. The capital controls were lifted gradually and Malaysia let go of the peg in 2015 after China revalued its currency.
Now as China devalues the renminbi and Malaysia economic and political fundamentals deteriorates, foreign exchange traders are asking if Malaysia will take out its old tried and tested capital controls playbook.
Kit Wei Zheng, Citigroup's Southeast Economist, today argues that while punitive capital controls are unlikely, implicit ones are quite possible. The Citigroup economist believes that for now punitive capital controls like 1998 are highly unlikely as they would shut Malaysia out of emerging-market bond indices and hence deficit financing. Still, he notes that investors believe implicit capital controls were possible. “More bureaucratic hurdles for resident companies trying to move money offshore” could be one way for Malaysia might try money fleeing the country.
One way to prop a wobbly currency is to raise local interest rates. But Citigroup believes a rate hike is unlikely. “At least a 100 to 150 basis point rate hike would be needed to defend the currency, which is unpalatable given softening growth and limited evidence of imported inflation,” the report noted. Except for cars, import prices were relatively stable despite the weaker Ringgit, due to lower commodity prices. “Drastic rate hikes would be counter-productive as softer domestic demand, and knock-on impact on non-oil fiscal revenues, could give speculators another reason to short the Ringgit,” the report argued.
Another way for Malaysia to stop the bloodletting in Ringgit is to repatriate residents foreign assets. The size of Malaysia’s offshore assets could be significant, the report notes. A sizeable difference between the trade data reported by Malaysia and its trading partners, the report said, suggests that a large chunk of export earnings are being kept offshore, notwithstanding Bank Negara’s regulations that export proceeds had to be repatriated within six months.
Prime Minister Najib’s initial appeal to to Malaysian corporates to repatriate liquid foreign assets has so far only had a limited effect. Some government-linked companies and funds have claimed that such a decision would have to be made primarily on commercial grounds, given the need for them to hit their target returns.
The Citigroup report also looks at other policy options to curb Ringgit weakness. Among them: Direct intervention. "The defense of Ringgit at 3.80 (to a US Dollar in 1998) was viewed largely as a political directive rather than a Bank Negara decision, and was less relevant after the Chinese Yuan regime shift,” the report said.
Citigroup noted that moral suasion undertaken by Bank Negara to deter Ringgit speculation has worsened US dollar liquidity. "The problem is exacerbated by Bank Negara, the 'lender of last resort' for US Dollar liquidity, intervening less in Forex markets,” the report said.
Citigroup says Ringgit weakness may now have overshot.
