Building on local currency resilience

AS Asean strengthens its economic integration, policymakers and central bankers are revisiting a long-standing ambition – to settle more regional trade in local currencies.

The push aims to enable lower transaction costs, reduced reliance on third currencies and greater resilience against external shocks.

At the heart of the move is the Local Currency Transaction Framework (LCTF) – an initiative by Bank Negara, Bank Indonesia (BI), and the Bank of Thailand (BoT) aimed at facilitating trade using Asean currencies like the ringgit, rupiah and baht.

Originally launched in March 2016 to encourage local currency usage for trade settlement between Malaysia and Thailand, the framework was expanded in December 2017 to include Indonesia.

Today, a range of local transactions can be facilitated within the framework including direct investments, income transfers and portfolio investments between the three countries.

Adoption is rising, but more room for growth

Progress has been gradual and steady.

As of 2024, RM11.7bil or 18.7% of trade between Malaysia and Thailand was settled in local currencies, up from just 6.4% or RM1.9bil in 2009.

Similarly, local currency settlements for trade between Malaysia and Indonesia grew from 4.5% or RM1.2bil in 2009 to 11.9% or RM8.8bil in 2024.

The push for local currency use also comes as regional trade continues to expand.

In 2023, total trade in Asean reached US$3.6 trillion, up from US$2.5 trillion a decade earlier.

And, intra-Asean trade now accounts for about a quarter of that total.

“The LCTF is an important pillar of regional financial resiliency,” Bank Negara assistant governor Mohamad Ali Iqbal Abdul Khalid tells StarBiz 7.

“It gives businesses an alternative to third currency exposure, which often gives rise to the possibility of increased cost.”

While the initiative builds on bilateral agreements between countries like Malaysia, Indonesia and Thailand, it is now being harmonised under a broader Asean template.

“The harmonised LCTF operational guideline consolidates bilateral arrangements into one framework.

“It improves consistency, scalability and efficiency. It can also serve as a model for other Asean members when they’re ready,” Iqbal says.

“This (local currency settlement) is a progression of Asean financial integration,” he says, noting that it complements other ongoing efforts such as QR code payment linkages and the banking integration framework under the Asean+3 umbrella, plus three being China, Japan and South Korea.

A key element of the LCTF is the role of banks as appointed cross-country dealers (ACCDs).

Locally, seven commercial banks have been appointed as ACCDs to handle Indonesian rupiah settlements, while nine are designated for Thai baht transactions under the framework.

“This allows for greater flexibility in accessing local currency,” says Iqbal.

“For instance, banks can provide direct quotations for the baht-ringgit exchange pair.”

Despite the progress, the adoption of local currency trade has gained more traction among large corporates owing to their financial needs.

Iqbal says larger businesses, with dedicated corporate treasurers, are more inclined to explore alternative currencies.

“Small and medium enterprises (SMEs) tend to be more comfortable to stick with conventional currency solutions due to its liquidity and stable lender base,” Iqbal notes.

However, as markets in Malaysia and Thailand mature, businesses are recognising the potential of using local currencies in trade settlements.

Iqbal points out: “If my supplier uses the ringgit and my buyer is in baht, why should I involve another third currency?

“It’s only natural for businesses to consider an alternative that may even be less risky.”

Iqbal adds that there are no targets for the growth of local currency trade, as it is driven by the appetite of businesses to renegotiate contracts and adopt the new framework.

Nevertheless, the broader benefits of the framework are evident.

“A deeper local market means more competition, lower costs and more aggressive pricing.

“This ultimately strengthens the domestic financial systems,” he emphasises.

Moreover, such initiatives enhance the region’s resilience, as it reduces dependency on external markets, especially in times of financial stress.

Success stories

On the ground, the LCTF has begun yielding tangible benefits.

“We had a Malaysian fruit exporter who previously billed in US dollars when selling to Indonesia.

“Now with the LCTF, he invoices in rupiah – and his volume went up,” says Adoni Idris, head of Maybank Global Markets during a panel discussion titled “Advancing Asean Financial Integration: Catalysing Trade and Investment” at the 12th Asean Finance Ministers’ and Central Bank Governors’ Meeting last week.

“It removed foreign exchange risk for the importer, making their pricing more competitive locally.”

She also cites a logistics firm with operations in both Malaysia and Indonesia, which needed to send regular payments to Indonesia for staff salary and local authority payments.

“Before LCTF, a lot of documentation was needed. For every transaction, you had to show proof of documentation to the bank.

“With LCTF, anything less than US$200,000 or equivalent, the client does not have to do that. which significantly eased operations.”

Still, obstacles remain.

Adoni explains that even when one party is ready to transact in local currency, the counterpart may not be.

“They might have regional treasury policies that mandate settlement in US dollars or euros. Or internal systems that are hard to reconfigure.”

She adds that awareness campaigns led by central banks, rather than just commercial institutions, are more effective.

“Clients trust the regulators. They need that confidence.”

Policy push and coordination are key

Experts say broader cooperation and regulatory alignment remain essential to unlock the full potential of local currency trade.

“We really need to be agile,” says Khazanah Research Institute research advisor Prof Jomo Kwame Sundaram.

“The current multilateral swap arrangements are a major step forward, but the question now is: how do we ensure a greater degree of consultation and cooperation?”

He adds that the goal is not to undermine the US dollar, but to develop more efficiency and resilience for growth and stability.

Bank Indonesia executive director Yoga Affandi shares that LCT efforts are already expanding beyond current account transactions to include portfolio investments.

Bank of Thailand assistant governor Pimpan Charoenkwan stresses that a robust ecosystem is vital.

“To make local currency work, you need the whole ecosystem,” she says, pointing to regulatory frameworks, liquidity and pricing mechanisms that still favour major currencies.

She adds that relaxing restrictions for ACCDs has helped banks offer better services, but awareness among customers remains crucial.

“We need to bring them to the market and make them see the benefits.”

Asean’s full shift towards local currency settlement and reducing its third currency reliance will depend on how quickly it can close the gaps – both technical and behavioural.