Bank Negara Malaysia (BNM), Malaysia's central bank, has announced further liberalization rules for foreign exchange (FX) transactions with the aim of promoting "greater efficiency in the conduct of international trade and a conducive business environment in Malaysia so as to strengthen the linkages with the regional and global economies." (Please click here for the official statement from the bank.)
There are three main notable changes from existing rules, which are: (a) the ability of a resident to settle trade transactions with a non-resident in ringgit. Non-residents must receive/pay ringgits to/from a non-resident account held with a licensed onshore bank; (b) all limits on resident companies' inter-company borrowings from abroad are now lifted (note "inter-company" borrowings); and (c) resident companies' limits on anticipatory hedging of current account transactions have been abolished in order to facilitate more effective risk management.
Implications for Malaysian and Non-Malaysian Corporates
The rule changes include the following:
- Malaysian and non-Malaysian corporates now have the choice of using the Malaysian ringgit (MYR) or foreign currencies to settle international trade in goods and services.
- Foreign corporates which undertake trade in goods and services with a Malaysian corporate will be able to obtain and make payments in MYR, as long the corporate has its own MYR account with an onshore bank (External Account) or uses the External Account of an appointed overseas branch of the banking group of an onshore bank.
- Foreign corporates which undertake trade in goods and services with a Malaysian corporate will be able to receive payment in MYR, as long as they have their own MYR account with an onshore bank (External Account).
- Foreign corporates will be able to hedge their MYR receivables and payables with an onshore bank or an appointed overseas branch of the banking group of an onshore bank.
- All spot and forward deals with the offshore branch will be covered back-to-back with the onshore licensed bank.
- Malaysian corporates can now hedge any amount of their anticipated current account transactions with an onshore bank.
Implications for Onshore and Offshore Investors
The rule changes should have no implications for offshore investors, as the MYR will only be allowed to be used offshore to undertake settlement in goods and services. The only implication of the rule changes for Malaysian investors is that all Malaysian companies will now be allowed to borrow any amount in foreign currency from their non-resident non-bank related company, in addition to its non-resident non-bank parent company.
China and Malaysia
As well as the above regulatory changes in Malaysia, China has announced that onshore (in China) RMB-MYR transactions are now permitted in the CFETS (China Foreign Exchange Trade System) interbank system. The key impact is that trade between Malaysia and China will no longer require the use of the USD as an intermediary. This will increase efficiency of trade settlement between the countries and may help to promote more bilateral trade, which in turn seems most likely to increase Malaysia's trade surplus with China. Over time, therefore, this will be net positive for the MYR, but in the short term the Malaysian regulatory changes above will have the bigger impact, we believe
BNM's announcement of FX liberalization is an important step towards facilitating offshore settlement of the MYR for international trade and goods services. However, in contrast with recent measures announced by China, Malaysia stopped short of allowing offshore trading of the MYR with non-Malaysian banks for non-trade purposes. In addition, given the wide use of the U.S. dollar (USD) for trade settlement in Asia, increasing use of the MYR for trade settlement is likely to be a slow and gradual process. However, settlement in MYR-CNY between Malaysian and Chinese corporates may gradually increase.
A key difference is that China has allowed corporates not involved in trading with the mainland to open CNY accounts with Hong Kong banks. This includes all Hong Kong banks as long as they are participants in CNY trade settlement. Therefore, offshore settlement is NOT limited to offshore branches of Chinese banks. This is in contrast with the FX liberalization in Malaysia where: (1) offshore settlement in MYR has to be for international trade of goods and services, and (2) offshore settlement has to be with licensed onshore banks, or with appointed overseas branches of banking groups of the licensed onshore banks.
The new measures imply that the MYR will have a broader range of use to undertake settlement of trade in goods and services for Malaysian and foreign corporates. The pace of this development will depend on how quickly corporates, both Malaysian and foreign, are willing to adopt the MYR to undertake settlement of international trade in goods and services. Naturally, Malaysian corporates will have an interest in paying and being paid in MYR to mitigate exchange risk. The same is true for offshore corporate hedgers. However, their ability to do so will depend on whether their counterparts are willing to agree. Given the wide use of the USD for trade settlement in Asia, the adoption of the MYR for trade settlement is likely to be a slow and gradual process. Note, there will not be a distinct "USD-MYR deliverable offshore market" mirroring the deliverable USD-CNY market, given that all spot and forward deals with the offshore branch will be back-to-back with the onshore licensed bank. One area where the USD could decline in popularity is trade between Malaysian and Chinese corporates. Starting on August 19, the People's Bank of China (PBoC) has begun to quote the CNY versus the MYR, within a trading band of +/- 5 percent. In addition, the PBoC reportedly said that it will consider launching CNY-MYR forwards and swaps. With the aggressive promotion by Chinese authorities, settling trade in CNY-MYR could rise in popularity, especially with Chinese corporates.
For SVB and its FX business in MYR, we manage MYR settlements through our correspondent bank and an operational account, or nostro, in country. One of the challenges of the new liberalization rules is that even major international money center banks might have had limited direct settlement experience in MYR and might not yet have mature settlement procedures, versus local banks. As a result of these changes, however, we are intensively evaluating the best options for local settlement through some of our international partners to ensure smoothly functioning payment functions in Malaysia. We will keep you posted on our assessment and any changes we might make to accommodate liberalization.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.