Local currency stabilises after clampdown on derivative and hedging market

Local currency stabilises after clampdown on derivative and hedging market

THE ringgit has been through a tumultuous ride since Bank Negara decided to act against the non-deliverable forward (NDF) market in December last year.

The gyrations following the clampdown of the derivative and hedging market made the value of the local currency volatile and saw it fall to around RM4.50 to the US dollar, and there were doubts whether the measures to shore up the local currency’s value would work.

It is not to say that the measures have strengthened the ringgit to where the central bank feels should be its fair value, but the ringgit has entered a period of calm after the stringent measures were announced.

Volatility in the trade of the ringgit against the dollar is down significantly, and the credit default swaps for the ringgit have fallen by some 50 basis points. Furthermore, the ringgit has been trading sideways against the dollar since January and has slightly appreciated against some of the currencies of its major trading partners.

The ringgit has been trading in a tight band of between RM4.42 and RM4.46 since the start of the year, which has been a welcome relief to many from the wide swings seen in 2016.

It has not been in an upward move against all of the currencies of its major trading partners, but the bleeding has apparently stopped for now. What has encouraged Bank Negara is that the conversion of foreign-exchange (forex) export proceeds has seen a net inflow into the domestic market.

In December, Bank Negara imposed a requirement for exporters to convert at least 75% of their export proceeds to ringgit, which was a key move to defend the local currency’s value. The move was in response to the growing unwillingness of exporters to convert their forex receipts into ringgit.

So far, that has worked. Year-to-date, some US$2bil has been converted into ringgit and that compares against an outflow of US$500mil in 2016 and US$8.4bil in 2015.

How that works out in the months ahead is uncertain, but Maybank Investment Bank Bhd in a note yesterday said gross external reserves have stabilised at around US$95bil since the second half of 2017 after falling from US$98.3bil in mid-November 2016. “Considering the US$372.9mil and US$741.3mil repatriated in December 2016 and January 2017, respectively, this implies that almost US$900mil was repatriated in February this year.”

Measures to emphasise onshore trading instead of the NDF market have also seen trading swings change in favour of the local market. Maybank IB said that average daily trading in onshore markets has improved to US$5.2bil in February compared with US$4.6bil in November last year.

“At the same time, the liquidity of the offshore NDF market for ringgit currency pair dried up to US$1bil or less now versus US$4bil to US$5bil previously, as the global banks who were the major market makers in this space have complied with the Bank Negara ruling and no longer provide offshore ringgit to the NDF market,” it said.

Bank Negara governor Datuk Muhammad Ibrahim says the value of the ringgit will ultimately depend on factors that drive demand for the ringgit. While he feels the measures have brought about some stability in the ringgit market, more needs to be done to ensure the ringgit’s value reflects its fundamentals.

Bonds

Another sign that the pressure on the ringgit has eased has been the bond market. Selling by foreign investors in the bond market has been enormous, with foreign shareholding of Government bonds shrinking to its lowest level since November 2015.

With the United States having embarked on its path to rebalance its long-term interest rates, foreign funds that held Malaysian Government Securities (MGS) took their money out of the local system, a scenario seen in other emerging markets, which were once prized for their higher yields.

In October last year, the total amount of MGS papers held by foreigners was RM184.6bil, which was a high. Based on the latest figures by Bank Negara, it was down to RM158.9bil as of end-February, meaning an outflow of RM25.7bil.

With yields spiking up as a result of the selling of the MGS, the share of foreign shareholding of the MGS too has fallen to 37%. If taken in its entirety, foreign shareholding of Malaysian debt, including private-sector debt, has fallen from about 35% to 26%, giving to an outflow of RM62bil.

Citigroup in a note says the bulk of reduction in foreign holdings in sovereign bonds was largely in shorter tenors, less than three years, especially papers less than a year to maturity.

“Bank Negara sees this largely reflecting the unwinding of holdings in the NDF market by offshore banks, which comprised 8% of foreign holdings as at December 2016. These were seen to be a major factor behind the ringgit’s volatility and destabilising. However, non-resident holdings by long-term investors had remained fairly stable,” it says.

Bank Negara does not expect much of that anymore for the rest of the year. It feels those who had wanted to exit have done so, and feels that a more sustainable level for foreign shareholding in MGS should be between 15% and 20%.

“The major ones have done their rebalancing of their portfolios,” says Muhammad. “Don’t expect large outflows (for the rest of the year).”

Trade balance

One of the key factors that helps with demand of the ringgit is the trade balance. Malaysia had been experiencing huge surpluses in its trade balance after the Asian Financial Crisis almost 20 years ago, but that amount has shrunk in recent years, as domestic consumption and investments took a bigger role in driving growth.

The worry has been the shrinkage of the trade account, and also the declining surpluses of the current account balance. In the past, it was said that the central bank, while keeping an eye on those surpluses, was happy as long it was on the positive side of the ledger.

The forecast for the current account balance is estimated at between 1% and 2% of gross national income (GNI) for 2017. This compares with a surplus of 4.5% just three years ago.

What Bank Negara is optimistic about this year is the improved outlook of advanced economies this year, and how the trade composition of Malaysia has altered over the past two decades. With better growth in the US, there is expectation that exports will improve by 5.5% this year, but that is countered by demand for capital and intermediate goods for the growing Malaysian and global markets.

Expansionary policy

CIMB Investment Bank in a report says the pivot to more expansionary policy in major economies like the US, the United Kingdom and China underpins the expected recovery in global trade. It says Malaysia is well placed to benefit from a rebound in global trade and gain from the resurgent commodity prices and increased appetite for manufactured exports.

“The spillovers from improved external demand and higher commodity prices are poised to keep the current account in the black in 2017 (RM17.4bil or 1%–2% of GNI), though narrower than last year’s surplus (RM25.2bil or 2.1% of GNI).’

Meanwhile, the wider services account deficit in 2017 reflects growth in trade and investment activities.

Muhammad says the export performance in January and February has been encouraging and the economy needs to diversify further to maintain a positive impact on the trade balance.

He points out to two measures undertaken by the Government’s current account taskforce, led by Finance Minister 2, which are improving tourist arrivals and import substitution for items needed for major projects as steps taken to improve the current account balance for Malaysia.

The flip side of that, which has put pressure on the current account and the ringgit, has been the repatriation of monies by foreign workers in Malaysia, which hit RM30bil last year from RM17bil in 2008. He questions whether the presence of such a large number of foreign workers is beneficial to the country.

Other activities that have strained the ringgit’s value are the amount of money Malaysians spent when travelling overseas (RM42bil) and the amount paid for consultants for their advice (RM35bil). Both have seen large increases from their amounts in 2008.