The Malaysian central bank’s moves to curb what it describes as “speculative and damaging” offshore trading in the ringgit are causing disquiet among investors and raising concerns about the regulator’s handling of the markets.
Bank Negara Malaysia has asked foreign banks to commit to stop trading the ringgit — Asia’s worst-performing currency against the US dollar in 2015 — in the offshore non-deliverable forwards market.
Malaysian debt is popular with overseas investors, who hold 36 per cent of Malaysian government securities — by contrast, global funds hold 15 per cent of Thai treasury bills and government bonds. The popularity of Malaysian debt has prompted concerns that overseas investors will no longer be able to hedge their exposure.
One banker in Southeast Asia said: “It’s a situation where you can’t exit the market. If you want to exchange ringgit for dollar you have to give an attestation that the client is not involved in the offshore market. You can give it for one or two specific clients but for most clients you can’t give it.” Foreign fund managers have been disconcerted by the action, the banker added.
A foreign investor said the Malaysian move was odd for the country, which is usually regarded as a steady bet. The Malaysian securities market is only “just about” functioning, the investor added.
Muhammad Ibrahim, Malaysia’s central bank governor, insisted in a speech on Friday that there was no new policy on capital flows, and no “proxy capital control”. Mr Muhammad said the central bank was taking measures to facilitate onshore hedging of the ringgit against the US dollar and Chinese renminbi.
Malaysia’s currency lost 18 per cent of its value against the greenback last year, as the country’s political leadership grappled with allegations of corruption linked to state investment fund 1MDB. However, investors’ concerns have subsided as Prime Minister Najib Razak weathered the storm. Mr Najib denies any wrongdoing.
The ringgit is now sliding again in a broader emerging markets sell-off prompted by the US election result. On the Friday after Donald Trump was elected US president, the ringgit fell to a 12-year low in offshore forwards markets, declining to 4.5395 to the dollar. On Monday the ringgit was down 0.1 per cent at 4.4237 per dollar.
In the speech on Friday, the central bank governor warned onshore banks against quoting the ringgit opening price referencing offshore prices, and said that markets should not “price ringgit excessively”.
He said the bank had taken action to reduce the “speculative and damaging influence of NDF activities”.
The central bank governor said: “Because of the estimated volume and its opaqueness, the NDF market clearly has the potential to undermine the integrity and financial stability of the onshore market.”
Mr Muhammad, the former deputy governor, was appointed to the top job in April when long-serving governor Zeti Akhtar Aziz stepped down. Ms Zeti was admired by bankers and foreign investors for strengthening the bank’s independence during her 16 years in the role.