KUALA LUMPUR: The measures taken to clamp down on non-deliverable forwards (NDFs) or offshore market trading for US dollar/ringgit last November were right, according to Bank Negara governor Datuk Seri Muhammad Ibrahim.
He said the central bank, while aware of the NDF market, had tolerated the offshore trading of the ringgit up until November last year.
However, when markets turned wobbly following the election of Donald Trump as US president, the central bank had to act, as the ringgit weakened well below the fundamentals of the economy due to funds flowing out largely on speculative bets fueled by Trump’s campaign promises.
Muhammad explained that the measures to restrict the activities in the NDF market were implemented to stabilise the spot or onshore market.
“The central bank had been tolerant of the NDF market because it had not impacted the spot market in Kuala Lumpur. But last November, it broke the norm and impacted the spot market.”
No offshore trading of the ringgit has been allowed since 1998 when the government imposed capital controls in the aftermath of the Asian financial crisis.
Muhammad noted that NDF trading for the whole of last year was three times Malaysia’s gross domestic product of RM1.26 trillion.
He added that 80% of the volume last year in the offshore US dollar/ringgit trading was speculative transactions and not reflective of the real economy.
The spread between the onshore and offshore rates widened even more after the US presidential election, with the offshore rates showing a weaker ringgit.
“We cannot afford to have the exchange rate dictated by others,” Muhammad said at an Invest Malaysia plenary session here yesterday.
He also said that the ringgit has become less volatile since March after exporters were told to convert three-quarters of their earnings back into ringgit.
Meanwhile, Muhammad said Malaysia would need to have strong international reserves to intermediate the potential outflows that could come from investors rebalancing their portfolios.
“One thing that has been on our side is the existence of huge investors in our bond markets such as the Employees Provident Fund, Retirement Fund Inc, insurance companies and asset managers.
“These investors are shock absorbers for our financial system,” he said, adding that investors should be more confident of the financial system as there were enough buyers and sellers.
Muhammad said the rule of thumb for a more stable bond market was for foreigners to hold between 15% and 20% versus 35% to 40%. Foreigners now hold 26% of Malaysia’s bonds versus 35% previously.
“We need to accept the fact that non-resident investors have to make money,” he said on the foreign selling of Malaysian bonds. Muhammad said that foreign investors provided another source of funding important to the economy, especially for long-term infrastructure projects.
He said that the bond market has remained stable because most of the long-term debt is held by investors in for the long haul.
On another matter, he said globalisation and technological advancement had often seen policymakers scrambling to respond. Muhammad said regulatory agencies, including Bank Negara, need to adapt to changes very quickly.
“The changing of public policies should not be regarded as a flip-flop. One should look at the policy intent, which is important, and not the issue of changing policies.
“We have to decide if it’s credible and be very clear of the outcome and implement it. We also have to explain it well and this is inevitably a challenging area,” Muhammad said.