Malaysia Seeks to Nix ’98 Parallel as It Herds Ringgit Bearsby and
Bank Negara vows to limit speculation on offshore forwards
‘Moving the goal posts’ may hurt confidence, RBC’s Trinh says
Malaysia’s attempt to cajole currency traders to stop selling down its plunging ringgit is evoking memories of 1998 capital controls among global banks -- a comparison policy makers were quick to discourage.
RBC Capital Markets and Brown Brothers Harriman said investors were reminded of the Asian financial crisis 18 years ago, after Bank Negara warned foreign banks this month against using offshore forwards to bet against the currency and vowed to limit speculation. While the central bank said Friday it was stepping in to “maintain orderliness” following a 5 percent tumble over the past month, Assistant Governor Adnan Zaylani said it wasn’t considering tightening controls on the flow of funds across its borders.
“The motivation to try and reduce speculation is a reasonable one from a central bank perspective,” said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. “But there are always unintended consequences. Moving the goal posts suddenly and at a whim has destroyed liquidity and foreign investor confidence.”
The ringgit tumbled for eight straight days through Friday before sinking as low as 4.4325 per dollar on Monday, the weakest since October 2015. One-month non-deliverable forwards, which fix a rate for exchanging the ringgit in the future but are settled in dollars, plunged 6 percent in the period and touched 4.5848 on Nov. 11, the widest discount to the spot rate on record.
The latest slump seems more urgent than the currency’s decline through to the middle of 2015. While that move helped slow economic growth and made consumers less likely to spend, only the past month’s drop spurred the central bank to expressly say it was intervening. The central bank has rarely disclosed any episodes of intervention.
Malaysia’s track record means some investors are nervous about the possible introduction of capital controls, though the economy is less vulnerable now than it was in 1997, Brown Brothers Harriman wrote in a Nov. 16 report. It said any limits on hedging would risk “scaring away” global bond investors.
“Definitely no capital controls, there’s not even any discussion of moving in that direction,” Adnan told reporters in Kuala Lumpur. “What we are doing is really trying to have a targeted measure to contain the offshore NDF market. We have to contain the influence of the offshore prices on the onshore market.”
After the ringgit plunged to a record 4.885 per dollar in 1998, then-prime minister Mahathir Mohamad imposed restrictions including a peg at 3.8 per dollar and a ban on offshore trading in the currency, blaming U.S. billionaire George Soros and other “rogue speculators.” The peg was eventually scrapped in 2005.
“Bank Negara’s statements are needed to ensure ringgit volatility is stemmed,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore. “We have to see it in the context of the current market environment we are in. Other central banks are also leaning against the wind and intervening in their own different ways and channels.” Maybank sees the currency strengthening to 4.25 per dollar by the middle of next year, supported by a possible cut in OPEC oil output.
Regional central banks are propping up their currencies after more than $1.2 trillion was wiped off the value of bonds worldwide in the week ended Nov. 11 amid speculation U.S. President-elect Donald Trump’s stimulus policies will quicken inflation. Indian state-run banks sold dollars on behalf of the Reserve Bank while Bank Indonesia has stepped in to stabilize the rupiah.
Global funds own more than a third of Malaysia’s government bonds, leaving it at risk during emerging-market selloffs. While foreign-exchange reserves have climbed in the past year, they’re still 31 percent below the record $141.4 billion reached in 2013, giving the central bank less ammunition to defend the ringgit.
It remains to be seen how effective Bank Negara’s efforts to control NDF trading will be.
“I don’t think they can contain the offshore market,” said Jeffrey Halley, a market strategist at Oanda Asia Pacific Pte. in Singapore. “Sending letters out and ordering people not to do it may have a short-term effect, but in the medium term it’s not a sustainable policy measure.”